The EU-Emission Trading System. Goals, Success and Challenges

Term Paper (Advanced seminar), 2016

15 Pages, Grade: 2,0


Table of contents

1. Introduction

2. The natural and anthropogenic greenhouse-effect

3. The European Union Emission Trading Scheme
3.1 The effects of pollution on the market
3.2 The Emission Trading Scheme and its expected effects

4. Empirical evaluation

5. Consequences

6. Conclusion


1. Introduction

Being and staying healthy is one of the greatest wishes of humanity because it is assuring a longer life. But not only a highly developed health system protects people from illnesses, also living in a clean and safe environment extends the span of life. This is why it is always interesting to discuss new solutions of the government which shall protect the environment, improve our climate and increase our sustainability.

With growing population and rapidly increasing industries there is more and more pollution on earth which disturbs our sensitive ecological system. One of the greatest problems of the humanity is the massive amount of emissions on earth which pollute our environment and create the greenhouse effect. For several years now, people are searching for ways to reduce their impact on the earth.

In year 1997 the Kyoto protocol was added to the United Nations Framework Convention on Climate Change, short UNFCCC, to reduce those emissions gradually.1 In addition to this contract the European Union created in 2005 the European Union Emission Trading Scheme, short EU ETS.[1] [2] It allows companies to buy and trade a certain amount of emission permits.

Even though in theory this scheme may appear flawless there are a few conflicts and negative consequences which have a big influence on some participating countries. Therefore it is important to discuss how to improve the European Union Emission Trading Scheme to have the lowest possible influence on companies with the highest possible reduction of greenhouse gases.

To get an overview, the problem of the emissions has to be explained first. After that, it is essential to explain the theory of the European Union Emission Trading scheme with a summary of the main expected theoretical effects. There must be an empirical evaluation about the real effects in comparison to the theoretical expected ones. This part will be followed by a discussion on how the government needs to change the scheme to improve the consequences. At last, there will be a conclusion which will sum up the outcome of the discussion and give a perspective on the future.

2. The natural and anthropogenic greenhouse-effect

Ever since Carl Benz had his automobile patented in year 1885, people all over the world are dependent on this comfortable transportation1 More and more cars were sold and the automobile industry creates more and more configurations which shall be safer, more comfortable or faster to satisfy the consumption of their clients.

But with every new car on the road, there are more emissions which pollute our environment. In fact, traffic creates around 10 to 20% of all greenhouse gases in the world, which affect the natural greenhouse effect negatively.[2]

The natural greenhouse effect is the reason that the planet earth is habitable. The sun sends short-wave rays, also called ultraviolet rays, through our atmosphere to earth.[3] The earth partly absorbs of those rays to heat up the environment.[4] The other part is reflected and wanders as infrared rays back into the atmosphere.[5] While ultraviolet rays can easily surpass the atmosphere, long-waved rays only emit in parts. Greenhouse gases in the atmosphere, like carbon dioxide, methane, water vapor, nitrous oxide, ozone and chlorofluorocarbons, again reflect a part of the rays which also heat up the earth.[6] Without the natural greenhouse effect the temperature on earth would be around -18°C.[7]

The more emission of anthropogenic greenhouse gases for example because of traffic, industry or agriculture reach our atmosphere, the less infrared rays escape our atmosphere which causes the climate warming.[8] Even though global warming is a slow process over hundreds of years, scientists already observe some consequences like melting polar caps, rising sea-level or more extreme weather events.[9] Carbon dioxide may not be the most harmful greenhouse gas, but with 60% it is the most produced emission all over the world.[1] In 2015 a total of 32.1 billion tons of CO[2] were emitted.[2] In comparison,in 2014 methane was emitted around 2,3 billion tons per year.[3]

In 2013 China emitted with 9,977 tons most of the greenhouse gases in the world, followed by the United States which produced 5.233 tons of emissions.[4] On third place was the European Union with 3.483 tons of emissions.[5] Despite their industry is obviously producing more emissions than other countries, the United States have not accept the treaty, yet.[6]

To reduce the anthropogenic impact on the environment, in 1992 the United Nations founded the UNFCCC.[7] Yearly, the participating countries hold conferences to discuss future actions. At the so called United Nations Climate Change conference in 1997 in Kyoto, an international treaty was signed, that should assure a reduction of greenhouse gas emissions.[8] The Kyoto protocol gives a limit on the total amount of the emissions of industrial nations per year. The goal is a cutback of 5% compared to the stand in 1990.[9] The treaty came to effect in 2005 when 55 states, which all in all produced over 55% of the C02-emissions of 1990, signed the paper.[10]

In the same year the European Union composed an agreement to support the Kyoto protocol, the European Union Emission Trading Scheme.

3. The European Union Emission Trading Scheme

3.1 The effects of pollution on the market

Pollution is a negative externality, because it affects the well-being on society and
therefore produces social costs.[1]

Most of the companies make their decisions without considering the impact on bystanders.[2] Therefore the market equilibrium is not efficient anymore, because it is not able to maximize the total gain.[3]

Society on the other hand has to take account of the social costs, which is why the market optimum shifts to a smaller quantity than the previous equilibrium4 Now there are two possibilities to solve the inefficiency: Either companies try to find a private solution or the government has to correct the market failure by law.

In this case, private solutions are predestinated to fail. There are far too many participating parties in the European Union, which makes it complicated and expensive to coordinate all of them to bargain5 Also there would be high transaction costs for lawyers and translators6 Therefore the European Union has to find a public policy to reduce the pollution.

The EU can either use market-based or command-and-control policies7 An example for market-based policies would be to introduce a Pigovian tax on pollution8 It means to detect the exact costs for the negative externality9

A regulation is an option of the command-and-control policies10 It is setting a limit to the pollution and every company has to adapt to it.[11]

Normally, companies prefer the Pigovian tax over regulations for many reasons12 The tax gives incentives to reduce the pollution even more, while a regulation sets a goal which has to be achieved13 Is the pollution level under the estimated limit, there is no need for companies to reduce their emissions more14 Also Pigovian taxes require less social costs, because every company can choose their lowest possible costs1 They decide whether it is worth paying the tax or if the cutback of the pollution is more convenient.[2]

The Pigovian tax may be preferred, but there are some major problems that prevent the use of this policy: Even though the Pigovian tax may be less expensive for society, it would produce high costs in administration and levy those taxes.[3] Additionally it is very complicated to find the correct tax to cover all social costs because there are many counting factors involved like for example the variable production level per year.[4]

3.2 The Emission Trading Scheme and its expected effects

In 2005 the European Union introduced their Emission Trading Scheme.[5] It is based on the Cap-and-trade principle, a regulation-policy: Cap means that the government sets a certain limit for emissions per year, which are split into pollution permits.[6] Factories then can purchase those permits to cover the emissions during the production.[7] Unused permits can be trade freely with other companies.[8] At the end of every year, all companies are obliged to present their permits otherwise they have to pay a fine.[9] In fact, the pollution permits have much in common with the Pigovian tax-system. Even though it is mainly a regulation-policy, companies have to pay for their pollution, just like with a Pigovian tax.[10]

Using the Pigovian tax, companies can choose how much they emit because of the amount of tax they have to pay.[11] The government decides about the limit of emissions with demanding a higher tax.


[1] Cf.H. Iwata, K.Okada (2012) p.326.

[2] Cf. Skjaerseth, J.B., Wettestad, J. (2009), p.101.

[1] Cf. Robert Bosch GmbH (2003), p. 10.

[2] Cf. Schallaböck, K.O. Et al. (2006) p.28.

[3] Cf. Schallaböck, K.O. Et al. (2006) ?.12.

[4] Cf. Ibid.

[5] Cf. Schallaböck, K.O. Et al. (2006) ?.12.

[6] Cf. Ibid.

[7] Cf. Lucht, M. (2005) p.l.

[8] Cf. Schallaböck, K.O. Et al. (2006) ?.12.

[9] Cf. Schallaböck, K.O. Et al. (2006) ?.17.

[1] Cf. Schallaböck, K.O. Et al. (2006) ?.14.

[2] Der Tagesspiegel (2016).

[3] Cf. Umwelt Bundesamt (2016).

[4] Cf. Zeit Online (2014).

[5] Cf. Ibid.

[6] Cf. Bundeszentrale für politische Bildung (2010).

[7] Cf.H. Iwata, K.Okada (2012) p.326.

[8] Cf.H. Iwata, K.Okada (2012) p.326.

[9] Cf. Kumazawa, R., Callaghan, M.S. (2010), p.203.

[10] Cf. Bundesministerium für Umwelt, Naturschutz, Bau und Reaktorsicherheit (2015).

[1] Cf.Mankiw,N.G., Taylor, M.P.

[2] Cf. Ibid.

[3] Cf.Mankiw,N.G., Taylor, M.P.

[4] Cf.Mankiw,N.G., Taylor, M.P.

[5] Cf.Mankiw,N.G., Taylor, M.P.

[6] Cf. Ibid.

[7] Cf.Mankiw,N.G., Taylor, M.P.

[8] Cf. Ibid.

[9] Cf. Ibid.

[10] Cf. Ibid.

[11] Cf. Ibid.

[12] Cf. Mankiw, N.G., Taylor, M.P.

[13] Cf. Ibid.

[14] Cf. Ibid.

[1] Cf. Mankiw, N.G., Taylor, M.P. (2014), pp.248.

[2] Cf. Mankiw, N.G., Taylor, M.P. (2014), p.249.

[3] Cf. Ibid.

[4] Cf. Ibid.

[5] Cf. Skjaerseth, J.B., Wettestad, J. (2009), p.101.

[6] Cf. Veith, S. (2010), S.7.

[7] Cf. Skjaerseth, J.B., Wettestad, J. (2009), p.101.

[8] Cf. Ibid.

[9] Cf. Europäische Kommission.

[10] Cf. Mankiw, N.G., Taylor, M.P. (2014), p.250.

[11] Cf. Ibid.

Excerpt out of 15 pages


The EU-Emission Trading System. Goals, Success and Challenges
ISEC-Institut Supérieur de l’Économie (dern. eufom University)
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ISBN (eBook)
ISBN (Book)
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VWL, Volkswirtschaftslehre, Emissions, Emissionshandel, Europa, Emission Trading System, EU Emission Trading System, EU, EU Emissions HAndel, Abgase, Pigovian Tax
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Ann-Sophie Theuring (Author)Sina Hüfner (Author), 2016, The EU-Emission Trading System. Goals, Success and Challenges, Munich, GRIN Verlag,


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