Legislation: The EU ETS Directive Revised: Yet Another Stepping Stone

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Keywords: EU Emissions Trading Scheme Directive, emission allowances allocation, single global carbon market, National Allocation Plan, monitoring and verifying emissions, auctions, solidarity mechanism

The legislative process of revising the EU Emissions Trading Scheme (EU ETS) Directive1 was rapid. The European Commission set forward its proposal for revision as part of a broader climate and renewable energy package2 in June 2008, and it was adopted only six months later during the first reading in the cooperative procedure. The swiftness of the legislative procedure, however, has not jeopardised the ambition of revising the Directive in a way that 'refines and improves the EU ETS in the light of experience gathered'.3 During the first two phases4 of the EU ETS, over-allocation of emission allowances was a chief problem, leading the price of carbon to plunge and the emissions trading market to the verge of collapse.5 Because different allocation rules in distributing emission allowances were applied across the EU ETS market, competition overall was distorted.6

The revised EU ETS Directive7 attempts to remedy the inconsistencies in the emissions trading market by creating a more harmonised emissions trading system.8 This includes centralising the setting of the cap on emissions, allocation rules, and codifying monitoring, verification and reporting requirements in regulations yet to be adopted by the European Commission. The centralisation in the revised Directive has given rise to questions about whether the new amendments are in fact part of a 'Commission coup',9 in which regulatory power is concentrated within the European Commission instead of leaving it in the hands of the Member States. Labelling the revised Directive a legal document that simply imposes strict centralised governance would, however, be an oversimplification of the EU ETS.10 Alongside the centralisation of the cap, a major revision of the EU ETS is the shift from 'grandfathering' to auctioning of emission allowances, which will be managed by the Member States. From this perspective, allocation of power under the trading scheme is balanced between the European Commission and the Member States rather than tipped either way. In order to digest the legal changes set out in the revised Directive, this article will focus on explaining the new rules by categorising them as 'centralised' and 'decentralised' features of the revised EU ETS, and in the final section explaining how the revised Directive manages to strike a balance between the two.

Overall, the revised EU ETS Directive is 'meatier' than its predecessor in the sense that it is a more detailed legal text, which seeks to respond to the lessons learned from previous phases of emissions trading in the EU. This does not mean that the revised text is final or complete. Creating a well-functioning emissions trading market in the EU is declared to be a 'learning by doing' process,11 which takes time and experience to finalise. From this perspective, the revised Directive may fulfil the ambition of 'refining' and 'improving' certain aspects of the EU ETS but in reality it is just yet another stepping stone in the complex process of establishing a successful emissions trading system within an EU and global context.

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