BENVGBE8: MSc EPEE Dissertation

The European Union Emissions Trading System: Lessons Learned from A Focused Analysis of Global

CO2 Cap-and-Trade Programmes

by

Christopher R. Glotfelter

1st September 2015

Word Count: 10,135

Paper submitted in part fulfillment of theDegree of Master of Economics and Policy of Energy and the Environment

Energy InstituteUniversity College London

Table of ContentsAbstract...................................................................................................................................... 3

I. Introduction........................................................................................................................... 3

II. Research Method and Methodology............................................................................6A. Research Strategy............................................................................................................................7B. Data Collection................................................................................................................................. 7C. Framework for Data Analysis........................................................................................................8

III. European Union Emissions Trading System............................................................8A. Brief Overview.................................................................................................................................. 8B. Phase I (2005-2007)..................................................................................................................... 10C. Phase II (2008-2012)....................................................................................................................11D. Phase III (2013-2020)..................................................................................................................13D. Phase IV (2021-2030).................................................................................................................. 16

IV. U.S. Regional Greenhouse Gas Initiative................................................................18A. Brief Overview............................................................................................................................... 18B. RGGI, Inc. v. the European Commission – An Operational Analysis......................................19C. Compliance Mechanisms..............................................................................................................25D. Mandated Programme Reviews.................................................................................................27

V. Chinese Pilot Programmes........................................................................................... 28A. Brief Overview............................................................................................................................... 28B. Insights for the EU ETS.................................................................................................................29

VI. Conclusion and Recommendations..........................................................................32

Bibliography........................................................................................................................... 35

2

The European Union Emissions Trading System:

Lessons Learned from A Focused Analysis of Global CO2

Cap-and-Trade Programmes

AbstractThis paper examines the EU ETS from legal and regulatory viewpoints focusing on

compliance and oversight. After an initial focus on the EU ETS, analysis turns to

counterpart systems in the United States and China in order to garner differentiated

insight into effective mechanisms for structural reform. Pertinent mechanisms are

theoretically applied to the EU ETS and the resulting impacts outlined. The

determination is made that the European Commission’s reactivity as it pertains to

compliance and oversight is insufficient to allow for a thriving carbon market decades

into the future.

I. Introduction

Successful sulfur dioxide and nitrous oxide emissions trading systems in the United

States created the basis for and, to an extent, the initial structure of the European

Union Emissions Trading System (EU ETS)(European Commission, 2000; Kruger

and Egenhofer, 2006). However, EU ETS failures in the first two phases have led

investors to question the long-term certainty of the system, as well as its ability to

provide sufficient flexibility to allow for continuous evolution (Wråke et al., 2012;

Laing et al., 2013; Martin et al., 2014). This has led to an acknowledgement of the

need for an overhaul of the system (Moore and Newey, 2013). While economic

mechanisms have been at the forefront of these discussions, much less attention has

been focused on the legal and regulatory underpinnings (Directive 2004/101/EC,

2004; Kruger, Oates & Pizer, 2007; European Commission, 2012; Bogojevic, 2013).

According to Freestone and Streck (2009), it is important to assess the legal

underpinnings of an ETS as “carbon markets are sophisticated entities, borne out of

3

a political decision to constrain certain forms of polluting behaviour; an artifice by

nature, thus, their very existence is contingent on the adoption of a of defined

objectives, procedures and substantive rules and procedures” (p.111). The legal

framework within which an ETS is constructed and subsequently operates is the

foundation of the system. Without an adequate foundation on which to build,

subsequent policy and economic considerations are rendered moot. It is therefore

imperative that the legal framework is constantly monitored for its adequacy to

support the overarching goals of the system.

Legal and regulatory framework failures of the EU ETS stem from two main

categories: compliance mechanisms and regulatory oversight. This has been of

particular note lately in the media (Voutsina, 2015). While these two areas have

been discussed in literature and have slightly adapted to changed circumstances

throughout the first two phases of the EU ETS, the European Commission (EC) has

taken a by-the-book, traditional approach to adaptation that may be inadequate in

dealing with such a modern, sophisticated system. That is, we must dispatch with

the idea that even as the EU ETS is relatively simple given its size and scope, it is still

comprised of complex, multi-level governance structures where there cannot be

simplistic, generic portrayals of regulatory mechanisms nor can its regulation be

singularly left to either the state or the market (Bogojevic, 2013). However, in our

analysis, we must be equally cognisant that ETSs are not “propagated in identical

sterile laboratories” that would lead to the notion that success in one jurisdiction

would necessitate success in another (ibid. at 10). Kruger, Oates and Pizer (2007)

make the case for initially centering emissions trading analyses around the EU ETS

due to its perceived ability to link together programmes in other countries and

regions of the world (p.112). While academics and policy officials generally agree

with this approach, there remains a lack of clarity around framework mechanisms

that would allow for an amalgamation of programmes and thus allow for cross-

fertilisation of the EU ETS via other systems. Scholars have intensely focused time

and brainpower on economic mechanisms for attaining compliance (e.g. emissions

cap, auctioning, banking, trigger prices and borrowing), but have largely left

4

untouched the legal and regulatory underpinnings (e.g. oversight, monitoring,

reporting, verification and enforcement) in terms of optimising flexibility and

harmonisation (ibid.; Mizrach, 2012; Martin et al., 2014). Traditional thinking will

not be enough to tackle the issues that arise within the EU ETS; it therefore becomes

imperative to analyse unique carbon emissions trading systems where new

solutions are being tested and proved. The age of the long honeymoon in legal

scholarship for pollution trading schemes therefore must come to an end

(Heinzerling, 2003).

In looking at a few choice carbon emissions trading systems: the EU ETS is a

mandatory, regional scheme made up of 28 member states and three EEA-EFTA

countries; the US Regional Greenhouse Gas Initiative (US RGGI) is a non-federally

mandated, regional scheme made up of nine northeastern and mid-Atlantic states;

and the Chinese pilot programmes (Chinese Programmes) are in the learning phase

in seven regions of a country with a distinctly bifurcated political oversight

structure and sometimes unique approach to compliance. In order to provide the

most meaningful analysis on how to improve global emissions trading systems and

proactively deal with any issues that may arise, always keeping an eye toward the

potential for linking systems, the EU ETS will be used as a starting point with the US

RGGI and Chinese Programmes providing additional insight.

To this end, I will analyse the proxies of compliance and enforcement mechanisms,

as well as centralisation and harmonisation of regulatory decision-making, for their

ability to be sufficiently rigid to ensure investor confidence while still maintaining

enough flexibility to amalgamate diverse national-level interests. These are

particularly important as shown by Freestone and Streck (2009), where they stated

that “where legislation defines [a topic] differently, but where the trading systems

are linked, such as in the EU ETS, difference in treatment can make one submarket

of the overall system more attractive than others” leading to market distortion, a

fundamental flaw in a cap-and-trade system (p.36). Shedding light on these issues is

important to elevate the EU ETS to such a level where it gains preferential status

5

amongst cap-and-trade programmes that others can emulate, rather than newly

developed ETSs having to start from scratch and inefficiently deal with problems

already tackled by the EU; the goal is to prevent duplicative efforts in order to allow

for quick and efficient ETS implementation to combat the effects of climate change.

Therefore, this paper will answer the following: What legal and regulatory aspects

of emerging carbon emission trading schemes can be used to enhance the effectiveness

of the EU ETS?

This paper is structured as follows: Section II provides the methodology through

which my analysis is made, Section III outlines the EU ETS through its first three

phases and discussions for the fourth phase, Section IV provides insights from the

US RGGI model, Section V takes novel insights from the Chinese Programmes and

Section VI concludes.

II. Research Method and Methodology

Beginning with the EU ETS and subsequently analysing the US RGGI and Chinese

Programmes, discernments will be derived from emerging ETS frameworks provide

restructuring insights for the EU ETS. In order to adequately develop these insights,

however, a methodology must be selected which is deductive (to account for the

qualitative nature of the analysis), mono-method (to account for time and resource

constraints) and cross-sectional (in order to obtain un-manipulated data at a given

time on the different trading schemes within my sample).

Rapid evidence assessment (REA) allows for a comprehensive and exhaustive

overview of pertinent research and provides sufficient time for a thoughtful

synthesis of evidence (Civilservice.gov.uk, 2015). Typically taking place over the

course of two to six months, REA allows the researcher to be discerning in their

source acquisition and analysis (ibid.). Further, REA allows for the sifting out of

studies or publishing of poor quality, those that may be generally applicable but do

6

not provide unique analysis or those that are subject to unacceptable levels of bias

(Booth et al., n.d.). To that end, as shown by Butler et al. (2005), REAs are

susceptible to selection and publication biases. During my research, it was

especially important to be cognisant of publication bias, as governmental and state-

run organisations that publish guidance and review documents may have a higher-

than-normal probability of favoring governmental action over inaction. However, as

literature is limited in areas such as reviews of the effectiveness of the Chinese

Programmes, as they are still in the pilot phase, publication bias was controlled to

the extent possible as these resources were utilised.

A. Research Strategy

My population of interest is current and prospective emissions trading schemes in

the global arena. The specific sample was derived from a non-probability sampling

method where qualitative analysis was performed through studying the schemes,

making sense of their applications and resultant effects and analysing the potential

correlational and causational effects (Denzin and Lincoln, 1994). This research is

further based on quota sampling where one ETS has been established for a decade

(EU ETS), one is still in its youth period and voluntary from a federal standpoint (US

RGGI) and one is in the midst of its pilot phase (Chinese Programmes), allowing each

to provide critical feedback that is not only delineated by locale but also by

structural components and ability to build upon others’ inadequacies. While quota

sampling is not random, and therefore triggers criticism as to its application to a

larger population, the selection of three vastly differentiated groups from a limited

pool decreases the selection bias effect (Biggam, 2008).

B. Data Collection

Information was obtained via secondary data sets beginning with the ETS

frameworks and followed by published scholarly and governmental works that

7

critically analysed the proxy variables. Both secondary data sets are freely available

in the public domain via online search databases. The organisational legal

documents were obtained through the official websites of each ETS and scholarly

works through searches in Scopus and UCL Metalib, and supplemented by print

resources from UCL’s libraries, as well as referred sources from my dissertation

supervisor, Chiara Armeni. As limited literature exists on this precise topic, this

method of resource exploration and retrieval provided the best means of eliciting an

exhaustive list of sources.

C. Framework for Data Analysis

Each ETS was analysed in turn, beginning with the EU ETS. Once the frameworks

were reviewed and the black letter law as it applies to the proxies outlined, a

literature review of the pros and cons of my proxy variables in the given scenario

allowed for a more complex understanding of the issues. Once this foundational

knowledge was gained, the regulatory requirements of the US RGGI were examined

with a literature reviewing providing additional context, allowing for delineation

between schemes. Finally, the same process was undertaken for the Chinese

Programmes and insights derived were used to improve the EU ETS, creating the

basis for restructuring the system with an eye toward using such as a global

emission-trading framework for emerging programmes.

III. European Union Emissions Trading System

A. Brief Overview

The EU ETS was the first and still is the largest cap-and-trade system for carbon in

the world. Comprised of twenty-eight EU and three EEA-EFTA countries, it provides

a glimpse into a large scale, cross-border ETS: both the successes and failures of

such a prolific system. Necessarily, a system of such size and complexity requires

8

continuous attention throughout its evolution in order to ensure that its

developmental pace is adequately coupled with enough flexibility to address risks as

they inevitably arise. Currently in its third phase, the EU ETS has already seen

numerous strategic corrections in its structural design to address problems during

the first two phases. A discussion of each of each phase, the issues arising during

them, and the corrections made for the current phase will help provide background

and context for later discussion into remaining issues and restructuring advice.

As a primer to allow for deeper understanding of system minutia, it is important to

understand how an emissions cap-and-trade system works. While not exhaustive,

the following provides a summary glimpse into the operational mechanisms of a

cap-and-trade programme. The central mechanism is the setting of a cap on

emissions, a total amount of CO2 (or its equivalent) that may be emitted within any

jurisdictional boundary. Once a cap is set, allowances are allocated to the regulated

entities (as determined by industry, installation type and size) by free allocation,

auctioning, or a combination thereof. Monitoring, reporting and verification (MRV)

infrastructure is then put in place so as to maintain the validity of the market while

allowing both the regulators and regulated entities the ability to track compliance.

Subsequent to the end of each compliance period, during the true-up window, each

regulated entity must surrender allowances equal to their emissions for the

requisite period. If they have an overabundance of allowances, any excess may be

banked for the following compliance period (if applicable) or sold on the open

market; if their allowances fall short of their emissions, they are forced to transact in

the market for additional allowances to meet their compliance requirements. This

form of emissions control provides incentives for regulated entities to reduce their

emissions and invest in cleaner technology so long as the cost of such an investment

is less than the cost would be to purchase additional allowances in the open market,

and it allows regulated entities the choice of how to comply, providing flexibility

that is not available under traditional command-and-control regulation. Therefore,

with this general understanding of how cap-and-trade systems function, I now turn

9

to a discussion of the EU ETS and the changes it has already seen during its first

three phases.

B. Phase I (2005-2007)

Coined “learning by doing”, Phase I allowed the European Commission (EC) and

national governments to implement the system and make necessary corrections in

order to prepare for the binding Kyoto requirements of Phase II (Ec.europa.eu,

2015b). However, regulators quickly learned how little pertinent information they

possessed and how that lack of information created ripples that eventually crippled

the allowance market by 2007 (ibid.). Without verified emissions data, a meaningful

cap on emissions could not be set; without a reliable emissions cap, allocations had

to be made based on the regulator’s best guess; because allocations were made

based on rules of thumb and theoretical models (as well as grandfathering these

allocations free of charge), regulated entities received a surplus of allocations; and

because these entities each had a surplus of allocations, the internal market failed

and the price of such allocations dropped to nearly zero – a glut of supply with no

corresponding demand. Regulators learned the hard way how crucial it was to have

significant compliance measures in place for MRV. According to Kruger and

Egenhofer (2006), achieving “high levels of compliance hinges on robust and

effective strategies for MRV, where confidence in the system relies on timely and

accurate information on emissions levels, allowance holdings and trades” (p.2).

Since no verified emissions data existed at the commencement of Phase I, the EU

ETS provided a solution dedicated to ensuring that this innate flaw did not plague

future phases. Directive 2003/87/EC of the European Parliament and the Council

(the 2003 ETS Directive) provided for the implementation of MRV infrastructure,

namely the Community Independent Transaction Log (CITL). While the CITL was a

EU-level, centralised database, it was merely a shell into which national-level

registries linked. That is to say it was simply a façade that masked unique national

10

registries set up and implemented by individual member states behind EU

legitimacy. Though these national databases were linked to each other and,

eventually, the CITL, there was no requirement of uniformity and a member states’

registry could be as rudimentary or complex as they wished, leading to the

possibility of syncing issues. Still, data flooded into the CITL during Phase I though

it quickly became evident that a spider web of national-level data amalgamated into

a central system was not the most prudent, efficient or reliable means by which to

measure progress. Further, the EC acting as merely a conduit through which

information was disseminated was not a practical means of operationalising MRV

procedures, or the EU ETS in a broader sense. This realisation that the EU must take

a more hands-on approach would begin to manifest itself throughout other aspects

of the system, though regulators woud still remain cognisant of keeping compliance

costs low so as not to heavily burden regulated entities.

However, even with its shortcomings, Phase I was “highly effective in making

boardrooms aware of carbon risks and opportunities and stimulating the search for

abatement opportunities” (Stewart, Kingsbury and Rudyk, 2009, p.222). Therefore,

this momentum had to continue and be bolstered through additional efforts to

streamline and increase the effectiveness of the EU ETS operationalisation.

C. Phase II (2008-2012)

Phase II brought with it the increased burden of Kyoto Protocol compliance. In

order for binding targets to be achieved, the kinks worked out in Phase I would need

to be assured not to arise again in the same or different form. Focused changes

were made in direct response to Phase I inadequacies. Of importance to note here,

changes included: a non-compliance penalty set at 250% that of the first phase, an

adjusted emissions cap which was 6.5% lower based on Phase I verified emissions

data (though allowance allocation was still mainly free of charge and not via

11

auctioning), and transition from the CITL to the European Union Transaction Log

(EUTL)(Ec.europa.eu, 2015d).

Though issues of non-compliance were controlled for in the 2003 ETS Directive,

practical adaptability required continuous response to market fluctuations and

natural development of the system. As a responsive regulator, the EC enabled a

proactive measure to deter noncompliance through a penalty rate over ten times the

average rate of an allowance. Proactivity, however, must not just be focused on one-

off singular aspects of a system, but also on the broader picture and on knock-on

effects of both action and inaction. As will be discussed later in this paper, deterring

noncompliance is not the only means by which goals can be achieved; incentivising

compliance also has its validity.

Allocations becoming (essentially) valueless in Phase I was a misstep that could not

be repeated within the system if it was to succeed. An oversupply of allowances

leading them to decrease in value detracts from a liquid market and is

counterproductive to a system in which flexible compliance is one of the leading

attractants for its credibility in being able to effectively and efficiently achieve its

stated goals. Data gathered through the MRV process during Phase I allowed the

setting of a more realistic emissions cap (and resulting national allowance allocation

plans). The reduction in the cap by 650 basis points was a strong signal to regulated

entities and investors alike that the system could meaningfully adapt by leaps and

bounds based on control mechanisms put in place throughout the phases. Though

some may question the need for such drastic changes, recalibrations such as these

can be seen as relatively normal at the beginning of newly implemented and

extremely complex systems as these frameworks are never flawlessly implemented

in the first instance.1

1 See U.S. Department of Energy’s, Energy Information Administration’s Annual Outlook for U.S. Electric Power 1991, regarding windfall profits from allowance allocations to standby or retired plants in the U.S. Acid Rain Program.

12

The EC commenced the system with a very hands-off approach where national

governments were given much leeway in order to determine how to best implement

each part in their jurisdiction: national allocation plans determined how allowances

were distributed, national registries fed into the CITL, exemptions were determined

on a national level. While the EC set overall targets and frameworks, there was

growing pressure to limit the ability of national governments to unilaterally

implement measures. The second phase, however, brought with it the notion of a

more harmonised and centralised approach, especially with regard to MRV. There

was a movement away from the CITL that allowed national registries to feed into a

supranational shell and toward the new European Union Transaction Log (EUTL).

The EUTL is of particular importance in this paper’s analysis, as it not only

represents a step toward increased harmonisation at the EU-level, but also a

compliance mechanism that now has closer independent regulatory oversight at the

supranational level. This single registry replaced national registries following the

ETS Directive revision in 2009. The EUTL “automatically checks, records and

authorizes all transactions” that take place between registry accounts (Ec.europa.eu,

2015f). Therefore, the EC itself can verify that all transactions are compliant with

set rules and regulations and there is less of a need for independent verification

based on state-level reporting. Further, the EUTL provides a compliance code (in

letter form: A, B, C, D, E or X) allowing public individuals the knowledge of whether

or not an installation is in compliance with its ETS requirements. This form of

“name shaming”, while minimal and somewhat subtle, is another step toward

improving compliance as it can negatively affect a company’s reputation in the case

of noncompliance.

D. Phase III (2013-2020)

In response to issues from the first two phases, and further due to investor

sentiment for increased flexibility as well as long-term predictability, the EC

amended the 2003 ETS Directive which brought about numerous changes to the

13

operationalisation of the EU ETS (Directive 2009/29/EC). Changes included a single

EU-wide emissions cap, further allocation of allowances via auctioning

(progressively increasing annually), harmonised allocation rules, coverage of

additional sectors and gases, backloading of allowances, a New Entrants Reserve

and a Market Stability Reserve (MSR, which was pushed up in timeframe as it was

originally sought to begin in Phase IV)(Ec.europa.eu, 2015d).

The EC determined the following to be more prudent items to deal with at the

supranational level: allocations, the emissions cap and market safeguards. National

level allocation and caps were done away with in favour of a single, EU-wide cap and

allocation rules. The EU has also signaled to investors that there will be increased

regulatory certainty via a set annual cap reduction of 1.74% per annum that will

continue post-Phase III, though a proposal has already been made to increase the

reduction to 2.2% per annum during this phase in order to drive up allowance

prices (Drozdiak, 2015). Further, the EC has seen fit to continue the trend of

allowance auctioning over free allocation. While 50% of allowances were auctioned

at the beginning of the phase, that number will rise to 70% by 2020 and 100% by

2027 (Ec.europa.eu, 2015a).

In a signal to regulated entities and investors, the EC has also put in place a New

Entrants Reserve and will be backloading 900 million allowances to the final two

years of Phase III in order to enhance market liquidity, maintain a stable price and

increase near-term investment in emissions reduction technologies (ibid.). This is

on top of addition new sectors and gases to the EU ETS, a signal that the EC believes

the system is functioning well and has a bright future within the EU’s regulatory

framework for climate change.

In another move to encourage investment in the system, the EC has proposed the

creation of a Market Stability Reserve to be implemented in 2019. The MSR acts as

an independent mechanism through which the market may operate more efficiently.

Should there exist a surplus of allowances in the market, an automatic trigger would

14

take surplus allowances above a specified level and place them into the MSR until

such time as the excess allowances are needed to provide market liquidity

(European Parliament, 2015). Through this mechanism, market liquidity would be

improved as well as protected via the EC’s ability to infuse the market with

additional allowances at the most opportune times thereby being able to control the

price of carbon at any given time. Further, in a show of independence and

impartiality, the MSR would operate “according to pre-defined rules which would

leave no discretion to the Commission or Member States in its implementation”

(Ec.europa.eu, 2015d). The MSR is an important example of how the EC is balancing

harmonisation with optimal regulatory oversight. Since the MSR is transparent and

subject to strict automated requirements, though the EC has the responsibility to

oversee the Reserve it has no independent ability to interpret how it is to be

implemented. If certain criteria are met, MSR mechanisms kick in until such time as

circumstances change. As will be shown later in this paper, this hands-off oversight

responsibility has begun to resemble that of RGGI, Inc. and may begin to provide the

foundational basis for such a regulatory oversight transformation.

Unfortunately, nothing more has yet been done to bolster compliance and

enforcement during this phase. Especially since discussions are already underway

to link the Australian and EU ETSs by 1 July 2018, improved oversight and

compliance reform must be on the EC’s radar.2 This reactive means of addressing

issues rather than proactivity is one of the issues set forth in this paper and an

aspect that will be dealt with in the subsequent section regarding the US RGGI. Still,

even with this reactivity, the EC is starting to look to the future in some regards,

already planning revisions that could be implemented during Phase IV.

2 Though the potential linkage of the Australian and EU emissions trading systems is not discussed in detail in this paper, its recommendation by the European Commission only elucidates the need for immediate structural reform based on global insights.

15

D. Phase IV (2021-2030)

Discussions for Phase IV are already underway. To reach the 40% GHG reduction

target by 2030, the EC has proposed the following goals: increasing the pace of

emissions cuts, better targeted carbon leakage rules, increasing investor confidence,

funding low-carbon innovation and energy sector modernisation (Ec.europa.eu,

2015c). In order to ensure they achieve these goals, the EC has carried out a

regulatory impact assessment and proposed to the European Parliament, the

Council and additional committees that the number of emissions allowances decline

at an annual rate of 2.2% (if not already the case during Phase III), free allocation of

allowances only for sectors at the highest risk for carbon leakage, and the creation

of two new funds, the Innovation Fund and the Modernisation Fund, in order to

assist the transition to a low-carbon economy (ibid.). Though these are merely

prospective at this point, they are worth a short discussion on how they would

operate within the broader structure of the system.

Unless earlier implemented in Phase III, total available emissions allowances will

decrease at an annual rate of 2.2% per annum in Phase IV. Speeding up the

emissions reduction process signals to investors that clean technology will become

ever more important in the coming years as regulated installations look to maintain

compliance. Further linked to this goal will be the creation of two new funds, the

Innovation Fund and the Modernisation Fund, which respectively provide the

stimuli to excel low-carbon technological innovation as well as a modernisation of

the energy sector. As these funds are controlled at the EC level, it is even further

evidence of centralised governance (even over policy choices) that will reverberate

well beyond the reach of the EU ETS.

While policy choices for the EU ETS are continuing to extend beyond the confines of

the system, another example is the EC’s apparent stance that it will seek to limit the

extent of carbon leakage by providing free allocation of allowances only to those

16

sectors at the greatest risk of such (Ec.europa.eu, 2015d). This move would signal

to investors that the sectors at greatest risk of carbon leakage are the ones that will

be most lucrative in which to invest thereby providing additional assurance that

investments will be made in these facilities addressing the problem at its source

rather than simply relocating the issue elsewhere, likely beyond the EU ETS’

jurisdiction.

However, even as novel ideas are put forth in order to address market liquidity and

raise the price of carbon, no additional ideas have been put forward to address

issues of compliance and enforcement. In order to round out the improved

economic mechanisms with likewise enhanced compliance and enforcement

mechanisms, it is imperative to begin thinking outside the box. In this context, we

must look outside of the control of the European Commission, beyond the 31

members of the EU ETS, to the two largest carbon emitting countries in the world

and how they are either proposing or have proposed overcoming these problems.

In order to deal with a system of this magnitude and complexity, we must seek

nuanced approaches from elsewhere in order to determine their applicability to the

system at hand. No one way of thinking can be applied across the board in each of

the various aspects of carbon emissions trading. Regulators must think bigger and

broader and then be able to take new ideas and tailor them to the scenario at hand.

In looking at the big picture, ensuring market integrity is the crucial key to a

successful system. Of course this is easier said than done. Market integrity requires

numerous items to come together in perfect harmony, including broad facets such

as transparency, reliability, predictability and flexibility. Additional insights need

not only come from the experience within the EU ETS. Other active and prospective

carbon markets can provide keen insight into how other jurisdictions are dealing

with similar issues. For example, viewing compliance in light of voluntary emissions

trading schemes can provide additional valuable mechanisms that incentivise

compliance rather than penalise it. And viewing how harmonisation is implemented

in a system with no centralised federal governmental regulator or a government in

17

which the federal element applies more stringent control over each aspect of the

system can bring with it key insights not otherwise apparent to a European-based

system. If the goal is to make the system better by any means, then consulting

various other comparable yet differentiated systems provides the opportunity for

such advancement.

IV. U.S. Regional Greenhouse Gas Initiative

A. Brief Overview

The US RGGI is currently comprised of nine mid-Atlantic and northeastern member

states (formerly ten prior to New Jersey’s voluntary withdrawal in 2011) that

agreed to form a cap-and-trade coalition at the regional level rather than in

response to a federal mandated programme. Due to the fact that the federal

government has failed to push carbon dioxide emissions trading legislation through

Congress (and the Clean Power Plan has yet to see full implementation), states have

taken it upon themselves to regulate this greenhouse gas as best as they see fit.3

Unlike the EU ETS whose centralised power is contained within the historically

galvanised European Commission, the US RGGI formed a new 501(c)(3) corporation

for the sole purpose of being a facilitating entity for the emissions trading system. 4

However, there are certain similarities between the systems, some of which are

reminiscent of the 2003 ETS Directive prior to the more harmonised approach

adopted in the 2009 amendment. RGGI member states are bound by a centralised,

absolute emissions cap that is then proportionately distributed amongst the states

based on their baseline emissions levels (Regional Greenhouse Gas Initiative, 2005,

pp.2-3). Further, allowance allocation is mainly via quarterly auctions, rather than

3 For state-specific instances and how the EPA is assisting states, see http://epa.gov/statelocalclimate.4 An in-depth analysis of this dynamic between the operating structures of the European Commission and RGGI, Inc. is discussed in the next section.

18

free allocation, and is organised by RGGI, Inc. However, this is where the

harmonised approach tapers off.

Though monitoring is a centralised task (RGGI, Inc. has responsibility for the

development and maintenance of the RGGI CO2 Allowance Tracking System (RGGI

COATS)), reporting and verification are all accomplished at the state level (RGGI,

Inc., 2006). State-level regulations control reporting and verification through

quarterly CO2 emission reports to each member state’s environmental agency (plus

the potential for quarterly reporting to the federal EPA as required on an

installation-specific basis). Once reported, each member state’s environmental

agency is required to verify the reports, with the additional requirement of third

party verification for all CO2 offset allowances (ibid.). However, there are aspects of

the RGGI that meaningfully differ from the EU ETS: the centralised authority’s legal

structure and operational competencies, and compliance mechanisms.

B. RGGI, Inc. v. the European Commission – An Operational Analysis

The institutional organisations (whether governmental or non-governmental) that

in essence preside over an emission trading system have the great responsibility to

ensure that the programme operates as smoothly as possible. Even in cases where

the organisation’s authority is imparted by those over which they regulate, or where

the organisation is provided little operational power, that the organisation exists in

the first place points to the fact that it is a necessary creation that is afforded its

proper place in the system. In the case of the EU ETS, the European Commission is

responsible for supranational decision-making, while RGGI Inc. is its counterpart in

the US RGGI.

Though each may be imbued with different operational authority, they operate on

the same plane with regard to ETS structure. It is important then to examine the

legal and operational confines in which each acts to first determine the efficiency of

19

each and subsequently to determine if there is any merit in applying some of the

principles of the RGGI structure to the EU ETS. That is to say, does the European

Commission provide the most effective and efficient oversight given the paralleled

success of its vastly different counterpart in the United States? This section will

provide an overview of each of the European Commission and RGGI Inc., analyse

where each has been successful (or less successful) in its applicable ETS, and

extrapolate whether the idea of a fledgling oversight entity with limited authority in

a centralised governance structure could have any implications for the EU ETS.

European Commission

The European Commission has a rich tradition and history as an executive body for

the European Union. Originating in 1951, the EC has the power to exercise the

following functions: proposing legislation, implementing decisions, upholding EU

treaties and managing the day-to-day business of the EU (Europa.eu, 2015). In all

respects, the EC is immensely intertwined in political affairs and has broad (yet

targeted) enforcement authority.

Operationally, 28 members head the EC, one elected from each Member State, with a

single President, a member who is proposed by the European Council and elected by

the European Parliament. Through this structure, each Member State has a voice in

the operation of the EU, though each member is required to act impartially with

respect to the goals and aims of their particular Member State, rather acting for the

European Union as a whole. Acting as an independent supranational authority

separate from state governments, and as previously noted in this paper, the EC has

recently received more authority to control how the EU ETS is implemented.

Necessarily, even though there is an independence from state governments, it is

much harder to maintain an independence from other related or correlated policy

decisions that may impact the EC’s actions. As the EC acts in a multi-purpose

fashion, and not to singularly implement the EU ETS, there is a threat of policy

20

leakage and bureaucratic politicking from other areas of responsibility into the

decisions of the EU ETS.

Moore (2013) rationalised the idea that a newly adopted independent agency may

be helpful in providing assistance to the EC, especially as it relates to short-term

interventions in the market, namely pre-established timetables and defined sets of

criteria (pp.10, 48-51). Taking this one step further, an independent agency may be

better suited to replace the EC as the oversight body of the EC for various reasons.

As will be shown in the following section, RGGI Inc. has a vastly different legal and

operating structure that brings with it it’s own strengths and weaknesses. However,

even though it has originated out of a different set of circumstances and through a

different operational context, RGGI Inc. may be able to provide some lessons for

improving the EU ETS by starting at the top of the hierarchical structure.

RGGI, Inc.

RGGI, Inc. (the Corporation) was formed as a 501(c)(3) non-stock, non-profit

corporation with a singular purpose: to act as a supra-state entity into which certain

enumerated responsibilities may be placed with regard to the US RGGI (RGGI, Inc.,

2007). The Corporation is controlled by a Board of Directors totaling 18 members,

two from each member state: one who is the head of the state’s energy regulatory

agency and the other who is the head of the state’s environmental regulatory

agency, unless otherwise specified by the state’s governor in special circumstances

(ibid.). These directors are appointed for a term that lasts until death, resignation or

removal (ibid.). Similar to the EC, Board members and officers of the Corporation

have a fiduciary obligation to reach decisions that benefit the Corporation as a

whole and are required to act without personal interest based on state preferences

(RGGI, Inc., 2014). Therefore, there exists the same need for Directors to remain

impartial and independent of the states in which they work and reside, instead

working for the general benefit of the US RGGI.

21

However, in stark contrast to the EC, the Corporation did not exist prior to the

creation of the US RGGI nor will it exist should it fail or otherwise be terminated.

The singular purpose of RGGI Inc. is evident as it is isolated from separate policy and

operational decisions. Though the enumerated purposes of the Corporation in its

by-laws are sufficiently broad in order to allow it to operate as a quasi-

governmental entity capable of creating and enforcing policy, it lacks the express

authority to act in such ways, being limited to the following activities (and further

limited based on individual operational contracts with each state): to act as a forum

for collective deliberation and action; developing, implementing and maintaining a

system to receive and store reported emissions data, and to track allowances;

developing, implementing and maintaining a platform for the auctioning of

allowances; providing technical support for the development of proposed changes

to the RGGI programme; conducting market monitoring related to the trading of

emission allowances; and providing technical assistance in reviewing and assessing

applications for GHG emissions offset projects (RGGI, Inc., 2007).

As the US RGGI was a voluntary coalition of states, it should come as no surprise that

the Corporation is essentially an entity created by agreement of the states that has

limited authority and exists mainly to provide an independent authority to which

the states may look should they need specific technical expertise. Though there is a

level of harmonisation and centralised authority within the Corporation, the states

have structured the system in a way that allows them to make most important

decisions within their boundaries based on their particular needs and then look to

the Corporation should there be an issue that applies broadly across jurisdictions.

This is even further seen through individual, state-specific contracts with the

Corporation that explicitly enumerates its function with regard to the particular

state and make appropriate budgetary allocations. Since state ties to the

Corporation are loose-knit and based on the particular state’s will to be bound by

contractual obligations, the ability to exit the system is relatively simple; the

example of New Jersey’s exit in 2011 is quite telling as they believed that they had

already met their long-term emissions reduction responsibilities and therefore did

22

not want to be subject to any additional oversight of their state programmes and

subsequently voluntarily removed themselves from the US RGGI (Navarro, 2011).

Applicability of RGGI, Inc. Principles to the EU ETS

Though not an exhaustive analysis and application of utilising the form and function

of RGGI Inc. with respect to the EU ETS, there are some resulting ideas of note that

could subsequently be explored in greater detail. First, the creation of a new

organisation without any historical predispositions could provide increased

impartiality in the operational effectiveness of the system. Second, an organisation

that is essentially structured as a single-purpose entity, one with the sole purpose of

operating and improving the carbon trading system, provides a source of specialised

knowledge without the need for anything extraneous or superfluous. Finally, an

executive committee (or Board of Directors or similar body) comprised of experts in

energy and environmental regulatory fields, rather than general, elected political

figures provides both increased specificity when it comes to operating and adapting

the system, as well as increased impartiality when it comes to making decisions, as

even though their state of residence may affect their decisions but their decisions

would be based only on their area of focus in the energy/environmental realms

rather than politicians who have broad-based platforms where interconnected

policies may detract from one another.

Let us quickly envision the United Nations, a supranational organisation whose

mission is to promote global human rights, prosperity and well-being, climate

change adaptation and resilience, sustainable development, gender equality,

governance, food production and peace and security (UN.org, 2015). Now suppose

that Country A is unequivocally denying its citizens of their basic human rights.

What is the UN’s likely response? It would not be surprising to see a peace envoy

and possibly even action of the Security Council. Why? Because this is what the UN

does, what it has done in the past and what it has made known that it will do in the

future. Circling back to the topic at hand, the same preordained responsiveness of

23

the EC could be highlighted. With the EC there is a historical context for their

actions that guide presuppositions for future action. To state that specific actions

are guaranteed is too strong a theory, but to believe that historical decisions are not

going to influence future action is ignorant. For that reason alone, looking at the

idea of creating a new, apolitical organisation with the singular purpose of operating

and improving a carbon emission trading system could provide the EU ETS with a

fresh look at regulatory and market reform. With no historical context in which

they would be forced to adhere, this new organisation would be free to blaze its own

trail, to be uninhibited by diffuse political ambitions. With no presuppositions, such

an organisation would be free to amalgamate its structure and policies based on the

task at hand and not five decades of historical baggage.

As touched upon previously, the creation of a new organisation with the singular

purpose of creating and operating an effective and efficient market for carbon

emissions has its merits. When extraneous aspects are removed from the field of

view, the focus itself becomes illuminated. Rather than limitations on EC authority

based on EU law, a specialised organisation may be formed and run separate from

legal principles limiting centralised authority or harmonisation. Whether this

would result in more or less of these items, it would remain to be seen, but the

removal of a presupposition in favour of one or the other would allow for a more

efficient allocation of responsibility based on its effectiveness and not its ability to

fit within predetermined boxes created in the past for different purposes. Though

some ideas are lasting and relevant throughout the ages, others must not be allowed

to continually insert themselves in new arenas just because they have been utilised

(even successfully) in the past.

Similarly, a political organisation is not necessarily the optimal bureaucratic

structure when it comes to carbon market oversight. Elected officials take office

based on the platform on which they ran. These ideals become reference points to

which they must adhere during their tenure lest they find themselves removed from

the position in the next election cycle. However, appointed heads of energy and

24

environmental regulatory bodies are, to a lesser extent, obliged to follow a specific

platform. While they will have their own beliefs and may or may not agree with

their country’s/state’s policies, they did not have to publicly tout their beliefs in

order to be appointed to their current position. Therefore, the Board members of

RGGI Inc. start from a position of improved impartiality and legitimacy with fewer

preconceived notions about what to do or certain aspects of emissions trading that

may be non-negotiable in their minds. Though each entity’s purpose (EC and RGGI

Inc. alike) is to be impartial and work purely to further the ETS, this is necessarily

much easier to accomplish when political ambitions and rhetoric are removed from

the equation. RGGI Board members are also specialists in their respective fields, not

generalists such as the EC officials. With deep knowledge of emissions reduction

methods and the markets in which the ETS operates, these individuals are able to

tackle the minutia and complexities that arise within these programmes. Rather

than being advised by others, they are themselves advisors and are able to pool

their knowledge and specific experiences in order to address the issues that may

arise. However, even with this deep specialised knowledge, they still saw fit to

mandate extensive programme reviews in order to regularly examine how well the

market is functioning and make changes, if necessary. This topic will be further

discussed in subsection D below.

C. Compliance Mechanisms

Compliance in the context of emissions trading varies, sometimes drastically, across

jurisdictions. In the case of the US RGGI, aspects of compliance are both more and

less stringent that its European counterpart. With regard to less stringent aspects,

the RGGI noncompliance price for failure to surrender the requisite number of

allowances is three times the allowance price. Though at any one time this price

may be higher (in absolute terms) than the EU ETS compliance price of €100,

proportionately it is drastically lower and therefore can be seen as less of a

deterrence mechanism. While the EU ETS is more stringent in this regard, the RGGI

25

approach does potentially carry with it some usefulness as tying the noncompliance

price to the price of allowances assures that it provides the same level of deterrence

regardless of the market price for carbon. Though merely tripling the market price

may not be the greatest deterrent, it provides certainty to noncompliant entities

that they will pay a certain multiplier of the current carbon price and therefore will

always be deterred at the same level rather than paying a set compliance price

against which they can hedge and pay less (in the form of a penalty, not as in

absolute monetary terms) as the market price increases.

Though the United States is generally a source of stringent command-and-control

regulation as well as rigid punishment for legal offenders, this more laissez-faire

approach underlies another area in which the RGGI may be seen as more flexible

while still maintaining its effectiveness: compliance control periods. The Model

Rule requires that each regulated entity holds 50% of their allowance obligation at

the end of each interim control period (defined as the first two years of each three

year compliance period), rising to full 100% allowance requirements at the end of

the three year compliance period (RGGI, Inc., 2013a). Rather than the requirement

of annual compliance periods, as is the case with the EU ETS, the RGGI provides

increased flexibility to regulated entities that allows for longer-term investments in

either energy efficiency or clean energy. Though this may superficially seem to be a

more lenient approach to compliance than in the EU, we must remember that these

states are voluntary participants in the system and, therefore, have to view

compliance through a different lens. Even with the more lenient approach,

comparable levels of compliance can be seen between the systems (96% for most

recent RGGI control period; 99% in 2014 for the EU ETS)(RGGI, Inc., 2015;

European Commission, 2015), which becomes especially noteworthy when

considering that the EU ETS has several additional years under its belt during which

it has had the ability to tweak its rules in order to bring compliance levels closer to

100%. Here we see that sometimes the carrot can be more effective than the stick.

While regulated entities want to achieve compliance, each entity may have

differentiated needs that require additional flexibility in order to achieve a

26

generalised level of compliance and the regulator’s acknowledgement of this is

crucial. Providing this additional flexibility, while still requiring a defined endpoint

where compliance must be achieved or penalties are assessed, allows for additional

creativity (and investment) on the part of regulated entities, as well as the potential

for a higher level of satisfaction with the system in general and its continuance in

the years going forward.

D. Mandated Programme Reviews

From the very beginning, as contained in the Memorandum of Understanding, a

comprehensive programme review was required in 2012 (Regional Greenhouse Gas

Initiative, 2005, p.10). Such review required the extensive examination of the

following programme components: program success; program impacts (as to price

and system reliability); additional reductions; imports and emissions leakage; and

offsets (price, availability and environmental integrity)(ibid.). This was not in

response to any perceived or actual shortcomings of the programme, but rather

envisioned as a necessary requirement in order to continuously improve the RGGI

and put in place prior to the ability to determine any shortcoming in the system

(ibid.). Throughout the 2012 programme review there was extensive stakeholder

engagement including the regulator, regulated entities, public and private

organisations and industry experts (RGGI, Inc., 2013b). From top-to-bottom the

programme was thoroughly dissected and then put back together, sometimes with

new requirements that were deemed necessary to ensure the RGGI’s continued

success.

Out of the 2012 programme review came several updates that were formalised in

the updated Model Rule dated 23 December 2013: size (45% reduction) and annual

percentage reduction of the regional emissions cap; banking of allowances and their

affect on the cap; the creation of Interim Control Periods and the requisite emissions

allowances to be held during such; the creation of a Cost Containment Reserve

27

(similar to the EU ETS’s Market Stability Reserve); updates to offsets and their

trigger mechanisms; and additional cleanup of unnecessary provisions from past

periods or the updating of definitions based on changed provisions (RGGI, Inc.,

2013).

The main point of a required comprehensive programme review is simple: provide

regulatory and investor certainty as to when and if changes may be made to the ETS.

In viewing this topic from the vantage point of the EU ETS, while revisions have

been made, there is nothing requiring these reviews to take place and, further, such

reviews are generally limited in scope to address some specific aspect of the

programme that has caused issue during the previous phase. There is no certainty

that these reviews will take place nor is there extensive stakeholder engagement to

allow for additional transparency and legitimacy. In order to improve upon a

programme as complex and nuanced as a CO2 cap-and-trade programme, certainty

goes a long way in providing confidence to an ever changing regulatory and policy

landscape.

V. Chinese Pilot Programmes

A. Brief Overview

Currently accounting for 24.6% of global GHG emissions, China has ranked as the

world’s largest carbon dioxide emitter since 2007 (Jiang, Ye & Ma, 2014; Munnings

et al., 2014). In its twelfth Five-Year Plan (2011-2015), China outlined one piece of

the puzzle to combatting these statistics: the creation of a CO2 cap-and-trade

programme (China. National Development and Reform Commission, 2011).

Through this plan, a carbon emission trading system would be graduated structured

based on pilot programmes based in five cities (Beijing, Chongqing, Shanghai,

Shenzhen and Tianjin) and two provinces (Guangdong and Hubei)(ibid.) Gleaning

insights from these pilot programmes, a national system would then be

implemented between 2016 and 2020 (ibid.). As each of the seven programmes are

28

slightly different and nuanced based on their respective localities and importance

within the broader system, this section will discuss specific aspects of several pilot

programmes as well as some generalities common between all jurisdictions.

Under the oversight of the National Development and Reform Commission (NDRC),

a national registration system has been formed and will be managed, along with

registration and recordation of emission reduction projects. Further, common to all

programmes is the one-year compliance period, mainly free allocation of allowances

and an intensity-based (rather than absolute) emissions cap that is tied to GDP

(Munnings et al., 2014). Beyond this, local authorities have been given authority to

structure the programmes as they see fit.

China’s unique culture has brought with it problems either not seen or not as

important in the US and European systems. Poor data quality due to (i) small

penalties for obstruction of inspection and falsification of data, and (ii) vague and

ineffective rules to fight statistical corruption necessitate more stringent compliance

mechanisms (ibid. at 15). Further, as Shenzhen has the authority to overrule

specific aspects of national environmental law due to its designation as a special

economic zone, special care must be given to ensuring compliance in this

jurisdiction (ibid.). Though these differences pose unique challenges for China, they

allow for unique insight into how the EU ETS may nip further noncompliance in the

bud even before it becomes an issue, acting proactively rather than reactively. The

next subsection outlines some of the proposed compliance mechanisms unique to

the Chinese pilot programmes and how they may fit into the EU ETS without

restricting the functioning of the market.

B. Insights for the EU ETS

Compliance is a serious concern in the Chinese pilot programmes. Especially with a

contingent cap tied to GDP, ensuring that regulated entities meet their requirements

29

becomes the lifeblood of such an emissions trading system. It is because of this that

compliance mechanisms in the pilot programmes focus on specificity and stringency

while always looking to maintain legitimacy. Specifically, the pilot programmes

have adopted tiered fines, special treatments for compliance and noncompliance,

extreme name shaming and even piercing the legal veils of companies and assets in

order to address executives who have acted through illicit means.

Though the European and American approaches to fining noncompliance provide

for one set amount for failing to surrender the requisite number of emissions

allowances, the Chinese are going even further. The Shanghai programme provides

for tiered fines that vary based on the type of noncompliance: (i) noncompliance of

reporting fine between 10,000-30,000 CNY; (ii) noncompliance of verification fine

between 10,000-50,000 CNY; and (iii) noncompliance of surrendering quotas fine

between 50,000-100,000 CNY (Ernst & Young, 2014). Further, above and beyond a

dissuasive fine, noncompliance of surrendering quotas also requires a firm to

surrender that allowance shortage in the following year, effectively double

penalising noncompliance (ibid.). Through this differentiated priority system China

is able to provide tailored noncompliance solutions within specific confines so that

compliance costs are not unduly burdened by one-off penalties without any

guidance. If the EC were to implement this ideology within the EU ETS, it would

increase the proactive deterrence of non-compliers.

In taking compliance even further, China is testing additional special treatment for

noncompliance, as well as special treatment sought to reward compliance. With

regard to noncompliance, the government has provided guidance that

noncompliance can trigger not approving new projects or expansions or not

allowing the enterprise to apply for special government funding for a period of two

years (ibid. at 19). Beyond this, and with specific regard to rewarding compliance,

Guangdong has proposed granting priority status for national low-carbon

development funding to firms in compliance with the carbon market (Munnings et

al., 2014, p.15). Through both incentivising compliance and penalising

30

noncompliance, China has set forth an all-of-the-above to guide firms toward not

only achieving compliance so as not to be penalised but wanting to achieve

compliance in order to take advantage of funding that may be helpful in current and

future projects.

Rounding out China’s compliance innovations, they once again take dealing with

compliance, especially with regard to unlawful acts, to a new level. As with its

European and American counterparts, name shaming is a tool that is often utilised.

In Guangdong, compliance status is periodically published in order to create social

pressure for compliance; Shanghai publishes unlawful acts on a government website

or publicizes such through the media (ibid.). However, they do not stop there.

Shanghai has also taken to piercing the legal veil of firms by recording unlawful acts

onto the credit records not only of the firms but also of individuals chiefly in charge

(ibid.). Though this may be seen by western countries as overstepping, the

deterrence effect is unmistakable: if company executives fear personal retribution

rather than just impacts on their company then it may make them think longer and

harder before breaking the law (or possibly even voluntarily failing to comply with

carbon market regulation, as the natural extension from penalising unlawful activity

to similarly penalising noncompliance is not without precedent).

As seen above, China has been more thoughtful and stringent than its western

counterparts. Since, as Scott (2011) correctly noted, the EU has begun to exert its

material power (e.g. size of internal markets) to creates incentives for other states

to act in a particular way and as the EU ETS seeks linkages of programmes

elsewhere in the world, maintaining an extensive and stringent compliance

framework will allow the EU ETS to deter future problems that may be beyond their

immediate control. Even though EU law principles of proportionality and non-

discrimination provide some protection, these will not protect the EU ETS from

national policy decisions by those linked to their system. Therefore, embracing

China’s approach to compliance may provide additional assurance that linked

31

systems maintain the same (or vastly similar) compliance requirements in order to

maintain market liquidity and legitimacy.

VI. Conclusion and Recommendations

Identifying potential flaws in the EU ETS even before they present themselves

provides the ideal scenario for a thriving carbon market. Determining the correct

levels of harmonisation/subsidiarity and oversight will allow the EU ETS the

flexibility to function well, improve upon its success and link otherwise

incompatible emission trading systems. Further, improving compliance efforts

especially when taking into consideration Scott’s (2011) view of the EU unilaterally

imposing itself on the global policy arena, will provide fertile ground that linked

systems and developing countries will require down the line. For the EU ETS to

maintain its position in the line of current and emerging emissions trading systems,

the programme must be sufficiently forward-looking and implement ideas that may

not be currently seen as necessities. In order for the EU ETS to prepare itself for

these coming challenges and take advantage of resultant opportunities, the

European Commission and the Member States should carefully weigh the following

insights:

Independent Regulatory Authority. Create an organisation either as a

replacement for the European Commission (only as it relates to the EU ETS)

or as a supplemental authority to balance out the EC’s inadequacies. Remove

historic predispositions from the mix while promoting an independent

organisation led by career energy and environmental regulators.

Noncompliance Pricing. Tie noncompliance pricing to a multiple of the

current market price for carbon thereby providing certainty and lessening

the ability to hedge against price changes that would provide incentive for

noncompliance.

32

Flexible Compliance Control Periods. Extend compliance periods beyond a

single year while still providing interim milestones in order to provide

regulated entities the ability to make longer-term investments.

Mandated Programme Reviews. Require programme reviews between phases

in order to allow for extensive analyses of current mechanisms and

exhaustive opportunity for stakeholder feedback.

Tiered Fines. Signal the regulated community that each form of

noncompliance will be dealt with according to its relative impact on the

functioning of the market. Allow for a range of fine for each tier in order to

accommodate differing levels of impropriety.

Incentivising Compliance. Provide the regulated community with reasons to

seek compliance rather than merely avoiding penalisation. Monetary

incentives may be (at least partially) paid for through profits from allowance

auctions. Non-monetary incentives should both further the regulated entity’s

bottom line as well as the goals of the EU ETS.

Increasingly Stringent Noncompliance Penalties. Subtle forms of name

shaming should be changed to more public means of impacting future

business decisions. Impacting a company’s bottom line should be

supplemented with means by which companies may be removed from the

market for a limited time or by other means with the goal of proactively

deterring noncompliance.

While the above mechanisms can provide short-term solutions to current and

prospective issues, they will also allow for a bright future for the EU ETS by

continuously and proactively allowing the system to evolve. Because implementing

these mechanisms while seeking to link additional ETSs in the global arena creates

33

its own potential issues, further research should be done in order to understand

how these revisions would be perceived by other countries and whether they would

be a hindrance in any way to the bottom-up linking of systems into a global

framework in the future. No one way of tackling an issue constitute the entirety of

solutions and ETSs must learn from each other in order to address problems that

arise in these vastly complex systems; to treat these intricate issues as one-

dimensional and to therefore attempt to solve them in a similar fashion would be

short-sighted and ignorant.

34

Bibliography

Biggam, J. (2008). Succeeding with your master's dissertation. Maidenhead: Open

University Press.

Bogojevic, S. (2013). Emissions Trading Schemes: Markets, States and Law. Oxford:

Hart Publishing.

Booth, A., Meier, P., Shapland, J., Wong, R. and Paisley, S. (n.d.). Alcohol pricing and

criminal harm: a rapid evidence assessment of the published research

literature. pp.8-9.

Butler, G., Deaton, S., Hodgkinson, J., Holmes, E., & Marshall, S., (2005). Quick but not

dirty: Rapid evidence assessments as a decision support tool in social policy.

APSAC Advisor, 17(2), 7-11.

China. National Development and Reform Commission. (2011) 12th Five-Year Plan

[Online]. Available at:

http://www.cbichina.org.cn/cbichina/upload/fckeditor/Full%20Translation

%20of%20the%2012th%20Five-Year%20Plan.pdf (Accessed: 22 August

2015).

Civilservice.gov.uk, (2015). What is a Rapid Evidence Assessment? - Civil Service.

[online] Available at:

http://www.civilservice.gov.uk/networks/gsr/resources-and-guidance/

rapid-evidence-assessment/what-is [Accessed 8 Mar. 2015].

Denzin, N. K. and Lincoln, Y. S. (eds) (1994). Handbook of Qualitative Research,

Thousand Oaks, CA: Sage Publications.

35

Directive (EC) 2003/87 of 13 October 2003 establishing a scheme for greenhouse

gas emission allowance trading within the Community and amending Council

Directive 96/61/EC [2003] OJ L275/32.

Directive (EC) 2004/101 of 27 October 2004 amending Directive 2003/87/EC

establishing a scheme for greenhouse gas emission allowance trading within

the Community, in respect of the Kyoto Protocol’s project mechanisms

[2004] OJ L338/18.

Directive (EC) 2009/29 of 23 April 2009 amending Directive 2003/87/EC so as to

improve and extend the greenhouse gas emission allowance trading scheme

of the Community [2009] OJ L140/63.

Drozdiak, N. (2015). EU Announces Carbon-Trading Revamp. [online] Wall Street

Journal. Available at: http://www.wsj.com/article_email/eu-announces-

carbon-trading-revamp-1436958131-lMyQjAxMTI1MzE1NTIxMDU2Wj

[Accessed 21 Aug. 2015].

Ec.europa.eu. (2015a). Auctioning - European Commission. [online] Available at:

http://ec.europa.eu/clima/policies/ets/cap/auctioning/index_en.htm

[Accessed 21 Aug. 2015].

Ec.europa.eu. (2015b). EU ETS 2005-2012 - European Commission. [online] Available

at: http://ec.europa.eu/clima/policies/ets/pre2013/index_en.htm [Accessed

21 Aug. 2015].

Ec.europa.eu. (2015c). Revision for phase 4 (2021-2030) - European Commission.

[online] Available at:

http://ec.europa.eu/clima/policies/ets/revision/index_en.htm [Accessed 21

Aug. 2015].

36

Ec.europa.eu. (2015d). Structural reform of the European carbon market - European

Commission. [online] Available at:

http://ec.europa.eu/clima/policies/ets/reform/index_en.htm [Accessed 21

Aug. 2015].

Ec.europa.eu. (2015e). The EU Emissions Trading System (EU ETS) - European

Commission. [online] Available at:

http://ec.europa.eu/clima/policies/ets/index_en.htm [Accessed 21 Aug.

2015].

Ec.europa.eu. (2015f). Union Registry - European Commission. [online] Available at:

http://ec.europa.eu/clima/policies/ets/registry/index_en.htm [Accessed 21

Aug. 2015].

Ernst & Young, (2014). Understanding China's Emissions Trading Schemes and

Emissions Reporting. pp.4-22.

Europa.eu, (2015). EUROPA - European Commission - The EU institutions explained.

[online] Available at:

http://europa.eu/about-eu/institutions-bodies/european-commission/

index_en.htm [Accessed 13 Aug. 2015].

European Commission. (2000). Green Paper on greenhouse gas emissions trading

within the European Union. Brussels.

European Commission. (2006). Building a global carbon market – Report pursuant to

Article 30 of Directive 2003/87/EC. Brussels.

European Commission. (2012). Guidance Document n°7 on the harmonized free

allocation methodology for the EU-ETS post 2012. Brussels.

37

European Commission. (2015). Compliance 2014 Code EN [Table]. Available at:

http://ec.europa.eu/clima/policies/ets/registry/documentation_en.htm

[Accessed: 25 August 2015].

European Parliament. (2015). Parliament adopts CO2 market stability reserve.

[online] Available at: http://www.europarl.europa.eu/news/en/news-

room/content/20150703IPR73913/html/Parliament-adopts-CO2-market-

stability-reserve [Accessed 21 Aug. 2015].

Freestone, D. and Streck, C. (2009). Legal aspects of carbon trading. Oxford: Oxford

University Press.

Gill, P., Stewart, K., Treasure, E. and Chadwick, B. (2008). Methods of data collection

in qualitative research: interviews and focus groups. Br Dent J, 204(6),

pp.291-295.

Heinzerling, L. (2003). The Environment, Entry in The Oxford Handbook of Legal

Studies 701-724. Oxford: Oxford University Press.

Jiang, J., Ye, B. and Ma, X. (2014). The construction of Shenzhen׳s carbon emission

trading scheme. Energy Policy, 75, pp.17-21.

Kruger, J., and C. Engenhofer. (2006). Confidence through compliance in emissions

trading markets. Sustainable Development Law and Policy VI 2: 2–13.

Kruger, J. and Pizer, W. (2004). Greenhouse Gas Trading in Europe: The New Grand

Policy Experiment. Environment: Science and Policy for Sustainable

Development, 46(8), pp.8-23.

38

Kruger, J., Oates, W. and Pizer, W. (2007). Decentralization in the EU Emissions

Trading Scheme and Lessons for Global Policy. Review of Environmental

Economics and Policy, 1(1), pp.112-133.

Laing, T., Sato, M., Grubb, M., Comberti, C., (2013). Assessing the Effectiveness of the

EU Emissions Trading Scheme, The Centre for Climate Change Economics and

Policy, Washington, DC.

Martin, R., Muûls, M., de Preux, L. and Wagner, U. (2014). Industry Compensation

under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading

Scheme. American Economic Review, 104(8), pp.2482-2508.

Moore, S. and Newey, G. (2013). If the Cap Fits: Reform of European Climate Policy

and the EU Emissions Trading System. [online] London: Policy Exchange.

Available at: http://policyexchange.org.uk/images/publications/if%20the

%20cap%20fits.pdf [Accessed 14 Jul. 2015].

Mizrach, B. (2012). Integration of the global carbon markets. Energy Economics,

34(1), pp.335-349.

Munnings, C., Morgenstern, R., Wang, Z., and Liu, X. (2014). Assessing the Design of

Three Pilot Programs for Carbon Trading in China, Resources for the Future,

Washington, DC.

Navarro, M. (2011). Christie Pulls N.J. From Greenhouse Gas Coalition. [online] New

York Times. Available at:

http://www.nytimes.com/2011/05/27/nyregion/christie-pulls-nj-from-

greenhouse-gas-coalition.html?_r=0 [Accessed 22 Aug. 2015].

Regional Greenhouse Gas Initiative. (2005). Memorandum of Understanding:

39

Regional Greenhouse Gas Initiative [Online]. Available at:

http://www.rggi.org/docs/mou_final_12_20_05.pdf (Accessed: 22 August

2015).

RGGI, Inc. (2006). Regional Greenhouse Gas Initiative Model Rule [Online]. Available

at: http://www.rggi.org/docs/Model%20Rule%20Corrected%208.15.06.pdf

(Accessed: 22 August 2015).

RGGI, Inc. (2007). By-laws of Regional Greenhouse Gas Initiative, Inc. [Online].

Available at:

http://www.rggi.org/docs/RGGIinc/Docs/Legal/rggi_bylaws_12_12_07.pdf

(Accessed: 22 August 2015).

RGGI, Inc. (2013a). Model Rule [Online]. Available at:

http://www.rggi.org/docs/ProgramReview/_FinalProgramReviewMaterials

/Model_Rule_FINAL.pdf (Accessed: 22 August 2015).

RGGI, Inc., (2013b). RGGI States Propose Lowering Regional CO2 Emissions Cap 45%,

Implementing a More Flexible Cost-Control Mechanism. [online] Available at:

http://www.rggi.org/docs/PressReleases/PR130207_ModelRule.pdf

[Accessed 5 Aug. 2015].

RGGI, Inc. (2014). Regional Greenhouse Gas Initiative, Inc. 2014 Ethical Guidelines and

Conflict of Interest Policy [Online]. Available at:

http://www.rggi.org/docs/RGGIinc/Docs/Policies/Conflict_of_Interest_Polic

y_2014.pdf (Accessed: 22 August 2015).

RGGI, Inc., (2015). 96 Percent of RGGI Power Plants Meet Compliance Obligations.

[online] Available at:

http://www.rggi.org/docs/PressReleases/PR060215_Final_SCP_Compliance.

pdf [Accessed 3 Aug. 2015].

40

Samuelson, W. and Zeckhauser, R. (1988). Status quo bias in decision making. J Risk

Uncertainty, 1(1), pp.7-59.

Scott, J. (2011). The Multi-Level Governance of Climate Change. Carbon and Climate

Law Review, [online] 25. Available at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2446423 [Accessed 5

Aug. 2015].

Stewart, R., Kingsbury, B. and Rudyk, B. (2009). Climate finance. New York: New

York University Press.

Un.org, (2015). Overview | United Nations. [online] Available at:

http://www.un.org/en/sections/about-un/overview/index.html [Accessed

22 Aug. 2015].

Voutsina, K. (2015). EU’s Emissions Trading System Needs More Oversight to Improve

Carbon Market. [online] Wall Street Journal. Available at:

http://www.wsj.com/articles/eus-emissions-trading-system-needs-more-

oversight-to-improve-carbon-market-1435838225 [Accessed 21 Jul. 2015].

Wråke, M., Burtraw, D., Löfgren, Å. and Zetterberg, L. (2012). What Have We Learnt

from the European Union’s Emissions Trading System? Ambio, 41(S1), pp.12-

22.

41