Legal and Market Uncertainty in Market-Based Instruments: The Case of the EU ETS
32 Pages Posted: 1 May 2010 Last revised: 10 Aug 2015
Date Written: April 26, 2010
‘Legal uncertainty’ is the uncertainty experienced by the parties to a lawsuit with respect to the outcome of litigation. When the consequences of a judgment extend to third parties, legal uncertainty can spread into markets and become ‘market uncertainty’. Thus, market uncertainty has relevant and pervasive consequences not only for the litigants but also for unrelated third parties. We argue that certain types of legal remedies cause the transformation from legal uncertainty into market uncertainty. This problem is particular to ‘artificial markets’, such as those created by the legislator for the purposes of marketbased regulation, e.g. the European Union Emission Trading System (“EU ETS”). Specifically, market uncertainty is a likely consequence of the use of restitutio in integrum (a property-rule remedy) as opposed to the use of damages (a liability-rule remedy). Recent litigation within the EU ETS provides a clear example of both the mechanisms of transmission of legal uncertainty to the market and of its causes. We identify the costs of letting legal uncertainty turn into market uncertainty and examine possible solutions to this problem.
Keywords: Legal uncertainty, economic uncertainty, market uncertainty, market-based regulation, property rules, liability rules, European Union Emissions Trading System
JEL Classification: D80, K20, K32, K40
Suggested Citation: Suggested Citation