Carbon Leakage in the Regional Greenhouse Gas Initiative: Lessons Learnt for the European Union Emissions Trading Scheme

30 Pages Posted: 25 Feb 2014 Last revised: 10 Apr 2014

See all articles by Charis van den Berg

Charis van den Berg

University of Groningen, Faculty of Law, Department of Law and Economics

Oscar Couwenberg

NHL Stenden University of Applied Sciences; University of Groningen - Campus Fryslan

Stefan E. Weishaar

University of Groningen - Faculty of Law

Date Written: February 24, 2014

Abstract

Emissions trading systems (ETSs) are emerging around the globe in response to climate change concerns. A severe side effect that may flow from an ETS is carbon leakage, which is generally understood as the shift of production to less regulated jurisdictions as a result of carbon pricing policy, and affects the environmental effectiveness of any ETS. In the US Regional Greenhouse Gas Initiative (RGGI) concerns about carbon leakage are related to electricity production. In the EU Emissions Trading Scheme (EU ETS), by contrast, concerns focus on industrial production as opposed to electricity production. This paper formulates policy lessons from the carbon leakage discussion in RGGI about the factors that will make carbon leakage in the electricity generation sector (electricity leakage) a problem in the EU ETS.

First, electricity leakage depends on the physical opportunity for importing power into the ETS region, which is determined by the existence of cross-border transmission lines, available transmission capacity and demand for imported electricity in the ETS region. Second; leakage occurs when there is a net financial incentive to import electricity. This arises when the costs related to cross-border transmission, including line loss costs, congestion charges and long-term contracts on the electricity market, are outweighed by the existence of considerable production cost differentials between regulated and unregulated out-of-region electricity generation. The paper analyzes how ambitious emission reduction targets and current developments in the framework of the Energy Community Treaty will bring about electricity leakage in the EU ETS. This inevitability requires timely regulatory clarification from the legislator for the purpose of preventing inefficiency from investments that turn out to be redundant ex post (stranded costs).

Keywords: Regional Greenhouse Gas Initiative, European Union Emissions Trading Scheme, emissions trading schemes, carbon leakage, electricity markets, Energy Community

JEL Classification: K32, Q48, Q54, Q58

Suggested Citation

van den Berg, Charis and Couwenberg, Oscar and Weishaar, Stefan E., Carbon Leakage in the Regional Greenhouse Gas Initiative: Lessons Learnt for the European Union Emissions Trading Scheme (February 24, 2014). University of Groningen Faculty of Law Research Paper 06/2014, Available at SSRN: https://ssrn.com/abstract=2400666 or http://dx.doi.org/10.2139/ssrn.2400666

Charis Van den Berg (Contact Author)

University of Groningen, Faculty of Law, Department of Law and Economics ( email )

9700 AS Groningen
Netherlands
+31503635757 (Phone)
+31503637101 (Fax)

HOME PAGE: http://www.rug.nl/staff/c.a.van.den.berg/index

Oscar Couwenberg

NHL Stenden University of Applied Sciences ( email )

Rengerslaan 8-10
Leeuwarden, Friesland 8917 DD
Netherlands
31 582441479 (Phone)

University of Groningen - Campus Fryslan ( email )

Wirdumerdijk 34
Leeuwarden, 8911 CE
Netherlands
31 582055000 (Phone)

HOME PAGE: http://www.rug.nl/staff/o.couwenberg/?lang=en

Stefan E. Weishaar

University of Groningen - Faculty of Law ( email )

9700 AS Groningen
Netherlands

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