University Paris Sud XI

What`s wrong with the EU ETS?

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The European Union Emission Trading Scheme (EU ETS) has been chosen as the basis of EU CO2 policy to promote market friendly mechanisms. The aim of this paper is to reconcile the facts shown by the first NAP with the economic rationale of information and incentives in the functioning of a certificates market. We will compare some EU Member States’ NAPs (France/ Italy/ Germany and United Kingdom) in the first period to show how both national government and national industries have rationally exploited the “Allocation Plan Failures” to their advantage. Firstly we will quantify the different existing methods of allocation in issuing free allowances. Secondly we will study the system’s functioning bases: baseline of historic emissions, treatment of new entrants, and treatment of closures’ installations. We will then try to explain what makes them so different, and which Member State gave the best incentives to deliver the best information and to reduce emissions. With a more efficient design of EU ETS, such difficulties will probably be reduced if not disappear.

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