Kuik, Onno; Oosterhuis, Frans --- "Economic Impacts of the EU ETS: Preliminary Evidence" [2008] ELECD 420; in Faure, Michael; Peeters, Marjan (eds), "Climate Change and European Emissions Trading" (Edward Elgar Publishing, 2008)

Book Title: Climate Change and European Emissions Trading

Editor(s): Faure, Michael; Peeters, Marjan

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847208989

Section: Chapter 8

Section Title: Economic Impacts of the EU ETS: Preliminary Evidence

Author(s): Kuik, Onno; Oosterhuis, Frans

Number of pages: 15

Extract:

8. Economic impacts of the EU ETS:
preliminary evidence

Onno Kuik and Frans Oosterhuis

1. INTRODUCTION
Emissions trading has always been advocated by many economists as a more
cost-effective instrument to reduce emissions in comparison with direct regu-
lation. The basic idea, developed by Dales,1 is that a cap on total emissions,
combined with free trading in emission allowances between polluters, ensures
that pollution abatement will take place where it can be done at the lowest
costs. In principle, therefore, emissions trading will always lead to net effi-
ciency gains and have a positive impact on overall welfare, unless transaction
costs are very high or serious market failures exist.
Nevertheless, there has been much discussion about possible negative
economic impacts of the EU ETS. Clearly, it was not the instrument of emis-
sions trading itself that was expected to adversely affect industry's production
costs and competitiveness. What raised concern was the mere fact that restric-
tions were imposed on emitting CO2, whereas in the past this could be done
freely, and whereas the global competitors as well as most sectors outside the
large energy intensive industry were not confronted with such restrictions.
This competitive advantage for industries outside the EU might lead to a shift
of `carbon-intensive' production to those countries, implying `carbon leakage'
with no net reduction of global CO2 emissions as a result.
The (almost completely) free allocation of allowances in the first stages of
the EU ETS has done much to make emissions ...