Nentjes, Andries --- "Emission targets and variants of emissions trading" [2016] ELECD 1491; in Weishaar, E. Stefan (ed), "Research Handbook on Emissions Trading" (Edward Elgar Publishing, 2016) 27

Book Title: Research Handbook on Emissions Trading

Editor(s): Weishaar, E. Stefan

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781784710613

Section: Chapter 3

Section Title: Emission targets and variants of emissions trading

Author(s): Nentjes, Andries

Number of pages: 23

Abstract/Description:

The idea to contain the use and waste of environmental resources, not by way of command-and- control but through a market where emission rights are traded freely, is approaching its 50th anniversary. In the environmental and resource economics literature, Crocker (1966) and Dales (1968) are usually mentioned as the founding fathers of the emissions trading concept, with Montgomery (1972) as the first to provide formal proof of its cost efficiency, and Tietenberg (1980, 1985) as the one who firmly advocated and established it on the economic research agenda. By contrast, the law and economics literature prefers to trace the emissions trading concept back to Demsetz (1967), who argues that externalities should be internalized by allocating property rights, and ultimately to the exposition of Coase (1960) that bargaining will lead to a cost efficient outcome regardless of the initial allocation of property rights (assuming transaction costs are negligible). About 20 years after the notion of emissions trading had been espoused for the first time, the United States (US) Congress made it actual policy in 1989 by making a cap-and- trade program for sulphur dioxide (SO2) emissions the cornerstone of its strategy to control acid rain. The literature knows several types of emission trading systems. In terms of the applied terminology their differentiation is not always clear cut but in the literature the following three types can be distinguished: Cap-and- trade (CAT), Credit Trading (CT) (also referred to as Performance Standard Rate Trading (PSRT), output-based allocation or tradable reduction) and intensity based trading. The latter is a form of emission trading design championed by several Chinese Emissions Trading pilot schemes and so it seems also the emerging Chinese national ETS and does not fit in either of the categories described before (Weishaar, 2014). This chapter, however, only reviews the first two.