A factory with smokestacks on a body of water.

Brendan Moore is a PhD student at the University of East Anglia, UK.

One of INOGOV’s key areas of focus is policy effects, and whether climate policy innovations are more ‘impactful’ than other policy options. An understudied type of policy effect is a policy’s impact on political processes once it is put in place. This blog post gives an overview of the long-term political effects of a key climate policy in the European Union: the EU Emissions Trading System (EU ETS). In the EU ETS, installations that emit greenhouse gas emissions must surrender one “emission allowance” for every ton of greenhouse gases that they emit. These allowances can be distributed for free to the economic sectors covered by the ETS (known as ‘free allocation’) or auctioned to the highest bidder. Each allowance can be bought and sold for a price, therefore allowance allocation has an important impact on who receives the economic value that emissions trading creates.

A key initial finding of my research is the importance of distributional politics in shaping EU ETS policy. For the EU ETS’s first eight years (2005-2012) approximately 97% of allowances were allocated to industries for free. However, from 2013 electricity generators were required to buy their allowances at auction, and 57% of allowances from that time were auctioned. This shift to auctioning was made possible in large part because some member states such as Germany which had initially been opposed to auctioning changed their position during policy discussions in 2007. One driver of this change – mentioned by interviewees and media reports – was the large amount of revenue that national governments were projected to get from auctioning.

The so-called “energy-intensive industries” such as steel, cement, and chemicals producers that avoided mandatory auctioning after 2013. For these industries, the maintenance and expansion of their free allocation became the most important ETS-related issue. These industries became very heavily involved in European Commission consultations related to free allocation, and interviews suggest that their advocacy was very focused on this topic. Although they opposed the attempts to raise the price of allowances which started in 2012 and continue in 2017, free allocation took precedence. This pattern was visible in recent policy-making in the European Parliament and the Council of Ministers on the post-2020 ETS. Energy-intensive industries focused on free allocation issues (see steel and cement industry press releases), and often did not even mention changes to raise the allowance price.

A counter-acting shift happened with member states and their support for higher allowance prices. There have been two major changes to the ETS since 2012 made to raise the price – backloading and the Market Stability Reserve, both of which removed allowances from future auctions to lower supply and raise prices. In the current 2017 discussions, there are also proposals to cancel allowances and make the Market Stability Reserve more stringent for the same reasons.

The effect of these changes on auctioning revenue have played a role in member state discussions. When proposals are made, several member state interviewees stated that one of the key analysis priorities is how those changes are expected to raise revenues in the long-term. Member state officials said that some member states such as the Netherlands, Sweden, and the UK are strongly in favor of those changes, while some Eastern European countries are strongly opposed. Auctioning revenues are more important for countries in the middle who are ambivalent about further ETS reforms, and revenue has played a role in building coalitions for repeated policy interventions to raise the carbon price.

Therefore, policy changes that are made to change the “policy effects” of the ETS on climate change mitigation and low-carbon innovation also have political effects which – in combination with other factors – reshape the political landscape through which future reforms must navigate. In combination with emerging research on the political effects of a wide variety of climate policies such as renewable energy support, these types of effects could be an important focus for future research.

These initial findings are part of my PhD research project on the EU ETS. I received funding from INOGOV for a three-month short-term scientific mission to Brussels, where I interviewed around 30 people involved in EU ETS policy-making. These interviews, combined with detailed analysis of policy documents, form the basis for this blog post.


Photo credit: Flickr/Rebecca Griffin

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