Two Directives, Two Politics − Prospects for the EU ETS

Abstract:     

The allocation rules for phase one EU ETS emissions permits demonstrates that energy generators were lobbying winners because they successfully blocked differential treatment from energy intensive industries, who cannot pass-on real or nominal costs of permits to consumers. The application of public choice theory predicted free allocations to industry, but failed to anticipate windfall profits for energy generators. In phase three, the reverse is true; energy intensive industries successfully established differential rules. These rules provide them with free allocations while most energy generators will be subject to 100 per cent auctioning. Public choice theory also failed to predict these changes. This paper presents the argument that a shift in Wilson’s Typology from client to interest group politics explains this change in allocation rules. This dynamism in Wilson’s Typology is demonstrated by comparing the positions of industry associations representing energy generators and energy intensive industries with the two directives before and after consultations, which facilitates the identification of lobbying winners and losers. The EU ETS case study is fertile ground for testing regulatory theories that explain shifts away from clientelist policies and towards more optimal policy equilibriums. This paper provides both a theoretical framework and empirical evidence for how emissions trading policy can be improved, despite rent-seeking, once it clears the legislative hurdle.

Number of Pages in PDF File: 38

Keywords: EU, climate policy, emission trading, windfall profits, rent seeking, Wilson typology