Abstract
The purpose of this article is to contribute with new insight to the widespread debate aimed at assessing the Emissions Trading Scheme (ETS) effectiveness in promoting emissions reduction. A theoretical benchmark consistent with the Polluter Pays Principle is determined to assess the ETS cap stringency and to evaluate if emissions tradable permits have been over-allocated by national and European authorities. This assessment clarifies how the emissions reduction burden deriving from the Kyoto Protocol ratification has been divided between ETS and non-ETS sectors. This analysis highlights to which extent Member States effectively rely on the ETS to comply with their Kyoto commitment and which inefficiencies emerge under permits over-allocation: namely cross-subsidization from non-ETS to ETS sectors, national subsidy to the ETS sectors and distortion of competition.
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