A Governance Perspective on the Choice between “Cap and Trade” and “Credit and Trade” for an Emissions Trading Regime

Abstract

This article discusses from a legal point of view an alternative approach towards allocating tradable greenhouse gas emission rights. The present EU greenhouse gas emission allowance trading regime starts from a decentralised allocation of emission rights, based on rather vague criteria stipulated in an annex to the greenhouse gas emissions trading Directive, and with much discretion left to the Member States. This approach, where most of the allowances are given free of charge to industries, entails that different amount of allowances can be given to equal installations vested in different Member States, is vulnerable to lobbying activities, does not stimulate at full force new climate-friendly options, and moreover appears to be an administratively complex instrument. Because of the fact that the present method contains such disadvantages, there is a serious need for examining alternative options. Besides auctioning, which is thus far politically seen not attractive because of the negative effects on the global competitive position of industries, it is also interesting to examine the so-called “credit-and-trade” regime as being a possible future approach towards allocating greenhouse gas emission rights in Europe and probably on a wider scale too. This approach fits better into the polluter-pays principle, deals easily with new entrants and closures, and is a concept from which harmonisation within the EU could be realised. It also contains some regulatory complexities, as all allocation mechanisms do. However, the concept has strikingly been subject to little debate in the literature thus far, and the merits of it compared to the other methods of allocation should be closely examined too.