Exploring Uncertainties: The 'Learning by Doing' Period has not Come to an End, and Will Still be at the Heart of the EU ETS

Abstract

The proposed amendment of the EU ETS entails that the private actors already covered by the legal framework of the EU ETS will face new challenges, meaning that they need to adapt to a different regulatory framework. Due to the far more stringent overall reduction target, even further going compared to other greenhouse gas emitting sectors, the emissions trading regime will by nature have a larger influence on the business sector. The basic question 'who can get, under what conditions, tradable allowances' will thus even be more relevant compared to the initial regime. This paper sheds light on possible uncertainties that industries might face following the new allocation provisions of the Commission proposal. We will take both 'legal certainty', taken in a wide sense, and 'business uncertainty' regarding the price to be paid for the allowances as starting points. By nature, business uncertainty is much more existent within auctioning compared to free allocation which seems to include a larger legal uncertainty, especially for the possible exposed sectors. The paper shows moreover the difficulty of designing allocation mechanisms and some complexities that might arise from them in the course of the trading period. It is particularly highlighted that it cannot be excluded that the executive regulations for auctioning and free allocation need to be amended in order to ensure the intended outcome of the scheme. In this sense, the learning by doing period has not ended at all. The paper concludes that from a perspective of governance, any legislator should incorporate the question of legal and business uncertainty if introducing emissions trading schemes or major amendments to such schemes. In fact, the environmental effectiveness could have been achieved with the current emissions trading scheme as long as the Commission would have conducted a strict inspection on the national allocation plans. For protecting the climate and for effectuating an emission reduction of 20 percent in 2020, the fundamental review in fact was not strictly necessary. The trade off of developing a framework for a level playing field and the avoidance of windfalls in the context of emissions trading is that industries need to face new regulatory approaches, for which it is not yet completely clear how they will affect their business activities.