Ex-post Analysis of the EU Emission Trading in Year 2013 in the Czech Republic

Abstract

ABSTRACT. The main goal of the paper is to provide the first ex-post analysis of the EU ETS in year 2013 in the Czech Republic, based on the analysis of the key EU ETS sector - combustion processes. Regarding the methodology, the empirical research was used as a one part, as a second part the Mamdani fuzzy rule-based system. Since the EUA market price was low in year 2013, the Czech companies within the combustion processes group had weak motivation to trade with the EUAs. However, the revenues obtained from the EUA auctions in year 2013 were higher than revenues obtained from the environmental taxes. Moreover, auctioned EUAs had the similar characteristics as the environmental taxes. We can say that the EUA behaved as an additional carbon tax - in case that the company exceeded the level of emission limit represented by free emission allowances.Keywords: emission trading; environmental taxation; EU ETS; Czech Republic.JEL Classification : H23, H3, Q48, Q58IntroductionGenerally, emission allowances trading, also called as cap and trade program, originally started up in the USA and currently it is frequently used throughout the world. National or sub-national emission trading systems are already operating in Australia, the European Union, Japan, New Zealand, Switzerland and the United States, and are planned in Canada, China and South Korea (European Commission, 2013). Besides trading with emissions (mainly CO2, NOx, SO2), there are also tradable fish quota or trading in waste sector, water protection sector and land protection sector.The European Union established a scheme for CO2 and other greenhouse gases' emission allowances trading, the EU Emissions Trading System (EU ETS). The initial EU ETS was based on Directive 2003/87/EC, which established a fundamentally decentralized system for the pilot phase of emissions trading (2005 to 2007) and the Kyoto Protocol commitment phase (2008 to 2012). The key instruments were the National Allocation Plans (NAPs) (Wettestad et al., 2012). In year 2013, based on new Directive 2009/29/EC, the EU ETS came into Phase III (2013 to 2020), the post-Kyoto commitment period.The EU ETS is substantially larger and by far more complex than the pioneering US Sulphur Allowance System (Conrad et al., 2012). The EU ETS covers more than 11,000 power stations and manufacturing plants in the 28 EU member states as well as Iceland, Liechtenstein and Norway. Aviation operators flying within and between most of these countries are also covered. In total, around 45% of total EU emissions are limited by the EU ETS (European Commission, 2013). The EU ETS covers both European Emissions Allowances - EUAs (since 2005) and European Aviation Allowances - EUAAs (since 2012). The market price of the allowances is determined by supply and demand at the exchange. Both in the first and in the second trading period, the EU emission allowances were traded mostly on the BlueNext trading exchange. In the third trading period, there is one significant big exchange, where the auctions can be organized - European Energy Exchange EEX (EEX, 2015).The regulatory framework of the EU ETS was largely unchanged for the first two trading periods of its operation (2005 - 2012); however the beginning of the third trading period in 2013 brings changes in common rules, published as Directive 2009/29/EC, which should strengthen the system. Since the EU emission allowances were previously grandfathered - for free (Wettestad et al., 2012), from year 2013 the significant yield of the emission allowances is auctioned. Grandfathering was widely criticized, mostly because it introduced significant distortions to the EU ETS (Falbo et al., 2013). Auctioning is the most transparent method of allocating allowances and puts into practice the polluter pays principle (Vicha, 2011; European Commission, 2013). Sectorial differentiation was also introduced, with (initially) far more auctioning of allowances for energy producers than energy-intensive industries. …