"China will not cooperate with the European Union on the ETS, so Chinese airlines will not impose surcharges on customers relating to the emissions tax," Cai Haibo, deputy secretary-general of the China Air Transport Association (CATA), told Reuters news agency (Suharto & Alison, 2012). Europe's cap-and-trade plan, the Emission Trading Scheme (ETS), was launched in 2005 as one of the main pillars of the EU's efforts to battle climate change. It was expanded on January 1, 2012, and includes all airlines using EU airports; one month after the EU's main court rejected a legal challenge brought by US- American carriers (Suharto & Alison, 2012). Being the world’s first international scheme for the trading of greenhouse gas emission allowances, the EU ETS covers some 11,000 power stations and industrial plants. It includes CO2 emissions from installations and factories in 30 countries, and is therefore the world’s biggest trading scheme in this field. The installations currently account for almost half of the EU's CO2 emissions and 40% of its total greenhouse gas emissions, as Nitrous oxides are also covered by the ETS (The European Commission, 2010).
Now, the topic of greenhouse gas emission allowances is more up-to-date than ever, as also non-European firms are held liable by the ETS. Global airlines and air transport organizations criticize the approach of the EU, as they still suffer from the global economic downturn and increasing oil prices (Milmo, 2011); European leaders in contrary see this action as one possibility to tackle the aviation industry’s contribution to climate change in absence of a global agreement (Illmer, 2012).
Table of Contents
1. Introduction
2. External Costs
3. Description of the instrument
4. Functioning and economic impacts
4.1 Cost Efficiency
4.2 Incentive for Research and Development
4.3. Ecological accuracy
5. Conclusion
Research Objectives and Core Themes
This paper aims to evaluate the mechanism and macro-economic effectiveness of Tradable Emission Rights (TER) as a tool to internalize environmental costs, specifically examining how cap-and-trade systems influence industrial production and global welfare. The research explores whether such instruments provide sufficient incentives for emission reduction and assesses the challenges of implementation within a globalized economic context.
- Mechanisms of cap-and-trade programs and initial certificate allocation methods (grandfathering vs. auctioning).
- Internalization of external environmental costs through market-based instruments.
- Economic efficiency and welfare gains resulting from the trade of emission rights.
- The role of policy in incentivizing research and development for emission-reducing technologies.
- Practical implications of the EU Emissions Trading Scheme (ETS) for global industries and consumers.
Excerpt from the Book
3. Description of the instrument
In a transferable discharge permit system, or Tradable Emission Rights system (TER system), polluters are assigned a certain number of TERs, each one of which allows the buyer to emit one unit (e.g. ton) of the waste material (e.g. greenhouse gases) (Field & Field, 2009, p.255). The goal is to reach a predetermined, politically fixed environmental standard- in this case a ceiling for certain greenhouse gases (e.g. CO2)- in a certain area (e.g. within the European Union). Furthermore the macro-economical costs should be limited to a minimum (Wicke, 1993, p.383). The most common form to use this instrument is the utilization of cap-and-trade programs (CAP). The initial step of a CAP program is to make a regulatory decision (e.g. through suggestions made by the German government to the EU) on the ceiling of the accumulated quantity of greenhouse- gases to be emitted in a certain area. This is the “cap”. TERs are certified and distributed among the sources responsible for the emissions (Field & Field, 2009, p.256).
As TERs are- compared to the natural environment- private goods, it is possible to get these certificates at a primary market, namely through the state. These rights of use can be transferred to third parties within a secondary market (e.g. the European Energy Exchange). Through the secondary market, trading is facilitated, and the price is determined by supply and demand of the TERs. This is the “trade” (Stengler & Wüstner, 1997, p.59).
Summary of Chapters
1. Introduction: This chapter introduces the EU Emissions Trading Scheme (ETS) and provides context on the global conflicts regarding the regulation of greenhouse gas emissions in the aviation industry.
2. External Costs: This section defines external costs in production, specifically focusing on how environmental damage caused by industrial activities negatively impacts society without financial compensation.
3. Description of the instrument: This chapter explains the functional mechanics of a cap-and-trade system, including the concepts of a pollution cap, primary/secondary markets, and the distinction between grandfathering and auctioning.
4. Functioning and economic impacts: This chapter analyzes how TER trading leads to an efficient distribution of emissions and discusses the resulting welfare gains through market mechanisms.
4.1 Cost Efficiency: This section details how trading emission permits allows firms to minimize costs and maximize profits by balancing their abatement costs against the market price of certificates.
4.2 Incentive for Research and Development: This section evaluates the extent to which the emission trading system encourages firms to innovate and invest in new technologies to reduce their environmental impact.
4.3. Ecological accuracy: This chapter discusses the effectiveness of TER systems in legally enforcing a predetermined, strictly limited pollution ceiling.
5. Conclusion: This chapter synthesizes the theoretical benefits of emission rights and highlights the practical challenges regarding initial distribution and market enforcement.
Keywords
Tradable Emission Rights, TER, Greenhouse Gases, Emission Trading Scheme, ETS, Cap-and-Trade, External Costs, Marginal Abatement Costs, Environmental Policy, Sustainability, Macro-economics, Aviation Industry, Pollution Ceiling, Cost Efficiency, Grandfathering
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines the macro-economic evaluation of tradable emission rights (TER) as a policy instrument to manage and reduce greenhouse gas emissions within a market economy.
What are the primary themes discussed in the work?
The core themes include the definition and internalization of external costs, the operational mechanisms of cap-and-trade systems, economic efficiency, and the role of innovation incentives.
What is the primary research goal or central question?
The primary goal is to determine whether Tradable Emission Rights systems are effective, economically feasible, and capable of creating sustainable incentives for environmental protection.
Which scientific methodology is applied here?
The paper employs a comparative theoretical analysis based on existing economic literature and case-based examples, such as the application of the EU Emissions Trading Scheme.
What is the central focus of the main body?
The main body breaks down the economic logic of TERs, comparing allocation methods like grandfathering and auctioning, and analyzing how firms utilize these markets to balance abatement costs.
Which keywords best characterize this study?
Key terms include Tradable Emission Rights, Macro-economics, Cap-and-Trade, External Costs, and Emission Abatement.
How does the "grandfathering" method impact firm behavior?
Grandfathering can motivate companies to emit more before a scheme is introduced to secure more free certificates, which may contradict the goal of reducing overall emissions.
Why might companies pass emission-related costs to their customers?
Companies pass on costs to maintain profitability, as seen in the aviation industry where firms include kerosene surcharges to compensate for the financial burden of participating in the ETS.
What is the benefit of an auctioning procedure for TERs?
Auctioning encourages the most efficient emission mitigation by forcing firms to compare the market price of certificates directly with their own internal abatement costs.
What is the primary advantage of the TER system over traditional taxes?
The main advantage is that it provides greater ecological accuracy by setting a firm pollution ceiling that cannot be legally exceeded, regardless of macroeconomic fluctuations.
- Citar trabajo
- Fabian Stillinger (Autor), 2012, Evaluation of tradable emission rights in a macro-economical context, Múnich, GRIN Verlag, https://www.grin.com/document/196569
