Emissions Trading and Policy Efficiency

The assignment delves into the concept of emissions trading as an effective tool for environmental policy, examining its efficiency criteria and standards. It also explores the path dependence theory and differences between permit and credit emission systems. Additionally, it considers the contribution of public choice theory to emissions trading, highlighting the importance of flexibility and innovation in reducing emissions.

Chapter one
The concepts and theories that explain related plans to trade
emissions:
Firstly-the global snapshot toward the development of the
emission trading:
First of all, there are many countries that try to eliminate
their emission greenhouse gases (GHG). Then, according to
(Ralf1 et al 2007) emission trading schemes has been
developed till 2007 that are around five schemes at all the
world. In addition, their schemes are divided such as; the EU
GHG emissions Trading Scheme, the New South Wales
greenhouse gases elimination Scheme, the Chicago Climate
Exchange, the Norwegian mandatory domestic emissions
trading scheme, and the Japanese voluntary emission trading
schemes.
For more details about all five schemes, there is a snapshot as
follow:2
The first is Australia: on one of January 2003, the New South Wales
Greenhouse Gas Reduction Scheme (GGAS) work to decrease their
greenhouse gas emission because of their production and the use
electricity, in May 2007 the Prime Ministerial Task Group (PMTG) on
emissions trading put a domestic emissions trading scheme that be
related to schemes at other countries. Also, in the same year, specifically
in the third of June, PTMG presented a plan cap and trade for carbon
emissions.3
The second is Canada; the Government of Canada announced a free
plan to reduce emissions of greenhouse gases on April 26, 2007. Also, this
plan insures that emissions trading should be a necessary component in
the government’s market-driven approach. This plan includes both a
domestic inter-firm trading system and a domestic offset system that is
easier for the company to participate in the clean development
mechanism, also, includes a plan per the six kinds of greenhouse gas that
1 - Ralf A. - Bernd H.- Peter L., Emissions Trading: Institutional Design, Decision Making
and Corporate Strategies, Library of Congress Control Number: 2008921861, 2008, p13,
available at:www.willylibrary.com.
2 - Ralf A. - Bernd H.- Peter L., op cit,pp 14:17.
3 -Ibid,P14.
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cause the problem of global warming with the rest of the pack emissions
systems in America and Mexico .In fact, there is the actual cooperation
between two provinces in Canada are British Columbia and Manitoba with
the five states of America to establish a plan which faces the
implementation of the emissions trading that serves all provinces
together.4
In April 2005 in Japan, a domestic Voluntary Emissions Trading Scheme
is being started according to the voluntary United Kingdom Emissions
Trading System (UK ETS), it began from 2002 till 2006 with 31 members
but the second period of the system for one year with 58 members, partly,
the cost reduction activities for greenhouse gas emissions reached ten
trillion per ton of carbon dioxide.5
New Zealand, the New Zealand Institute for Economic Research (NZIER)
put an initiative scheme on March in 2007 that it contents recognized all
the kinds of GHG; in addition to that it includes the upstream and
downstream approach.6
Norway, a mandatory domestic greenhouse gas emission trading
schemes had been implemented by the government of Norway from 2005
to 2007 according to European Union greenhouse gas emission trading
act. This scheme encompasses all kinds causing of co2 that free from co2
taxation.7
South Korea, the government of South Korea try to establish a
domestic carbon credit market at the end of 2007, then, the government
accept officially fifty projects that aimed to decrease GHG.Also, there will
be a possibility to sold the credit as a certified emission reduction, it
should be sold in two ways: the first, if it meet the market standards, the
second, if it sold to the government for a fixed price.8
Switzerland, the government of Switzerland focuses toward the
companies which bear legally obligations because of their emissions. In
according to these companies would be exempted from co2 taxation that
is started from January 2008.9
United States of America, the first voluntary scheme at Chicago
Climate Exchange(CCE) which was started in 2003 with13 participates
that included all kinds of GHG.While, in 2005,but now,CCE has 300
4 -Ibid,P15.
5 -Ibid, P15.
6 -Ibid,P15.
7 -Ibid, P16.
8 -Ibid.
9 -Ibid.
2

participates from all sectors and offset projects. After that, Regional
Greenhouse Gas Initiative (RGGI) is cooperation consists of nine states,
RGGI aimed to improve mandatory market-based cap-and-trade program
for the electric power sector.10 In the direction to development, there is
California’s Global Warming Solutions Act to solve the problem global
warming which aims to reduce emissions in accordance with the base
year 1990 in the Kyoto Protocol until 2020, and according to this law
united five states of America and two provinces in Canada as an initiative
of climate change for Western countries to Create a mechanism reduce
emissions that depend on the market.11
The researcher conclude from the above that, trade plans emission are either
mandatory or voluntary, as there are many plans at the level of most countries,
and these plans based on two main factors: the first, reducing emissions of the six of
greenhouse gases, especially carbon dioxide, the second, motivate polluters to
reduce their emissions by the government who making plans for emissions trade.
Secondly- the concept of emissions trading:
The problem of environmental pollution, especially air
pollution is very serious and it requires more attention and
interest particularly after the increased activity of the human
element, as a result of this interest at the international level
the Kyoto Protocol12 .It was issued in 1998 with the United
Nations Convention on Climate Change, the Kyoto Protocol has
flexible mechanisms work to reduce emissions, such as
emissions trading and clean development and joint
implementation. In according to George et al13 Kyoto Protocol
depends on the cap and trade program which sets the target of
greenhouse gas emissions reduction, and it facilitates the entry
of companies in the stage of trade or carbon permit are allowed
between companies and individual entities. The cost of the
Kyoto Calculated as the difference between each scenario of
zero cost under the usual system business and the scenario at
10 -Ibid, P17.
11 -Ibid.
12 - For more details see to Kyoto Protocol to the United Nations Framework Convention on Climate
Change,United Nations,1998.
13 -George M.- Alison, Deborah S.C., A Review of Carbon Trading Theory and Practice, 2007,P2, Electronic copy
available at: http://ssrn.com/abstract=989271.
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least cost. Also, the difference represents this total emission
reduction according to the Kyoto profile.14
In according to both Jan and Heinrich15 Emissions trading as
a tool economical more favorable than other economic tools to
deal carbon dioxide emissions. Also, it can be described as a
tool of economic sufficiency and efficiency which leads the
decision-makers within the companies to re-design decision-
making processes and management creativity.16 Dominik et al17
define emissions trading as an administrative approach used to
be by the government to control pollution through economic
incentives that grant to polluters to reduce their emissions.
In addition, Ralf et al18 defines tradable emission permit as
an instrument innovative relatively in environmental policy
around the world. One of the carbon commodities are traded in
carbon market clean development is the credit emission which
is used in emission reduction projects in developing countries,
and the clean development market is set up to encourage the
private sector to transfer the technical environmental from
developed countries.19
The researcher believes that emissions trading may
be considered as an environmental tool Policy aimed to
the management of climate change for encouraging
each pollutant to continue toward keeping the clean
14 - Umberto C. - Alessandro L.- Francesco P., Kyoto Protocol and Emission Trading: Does the US make a
difference?, CLIM – Climate Change Modelling and Policy,2001,P3,available at
http://papers.ssrn.com/abstract=293660 or http://www.feem.it/web/activ/_activ.html.
15 -- Heinrich T.- Jan Z., Business and emissions trading from a public choice perspective – waiting for a new
paradigm to emerge, a chapter of book which is Emissions Trading: Institutional Design, Decision Making and
Corporate Strategies,2006,P42.Available at www.willy.com.
16 - Ibid.
17 --Dominik M.- Massimo G.- Anke E.- Otto R., Design of Emission Allocation Plans and Their Effects on
Production and Investment Planning in the Electricity Sector, a chapter of book, Emissions Trading:
Institutional Design, Decision Making and Corporate Strategies, 2011,P72, Springer Heidelberg Dordrecht
London New York.
18 - Ralf A. - Bernd H.- Peter L.,op cit,P42.
19 - Adam G.- Diana M., Accumulation by Decarbonisation and the Governance of Carbon Offsets, Vol. 84 No. 2
2008, P132, Clark University,www.economicgeography.org.
4

air as one of the natural resources that should be
maintained. Then, there new kinds of good are right
emission and credit carbon
.
Accordance with Harro20who said to the idea of a tradable
permit approach, which is the mechanism for general Policy to
return for problem of determining the social cost. While, the
background of the approach is the government which sets a top
limit, there are many relevant issues for the number of permit
limit, it should be for every pollutant that saves and emits a
certain amount of emissions from the permit limit of pollutions
at the environment, during the period of time that is supposed
to be a year. After that, every pollutant easily has a right
trading with other for achieving a low marginal cost reduction,
then, if the pollutant has excess permits which sold by price
market, then, the pollutant could achieve a high marginal cost
reduction.21 Then, it creates the demand and supply in the
carbon market.
The demand and supply of the right emission is calculated
according to the curve margin reduce cost at the level of many
countries, each country try to reduce the margin reduction cost
to the equal point with the price emission right.22 Furthermore,
the supply side for the carbon emission represents in the case
that the margin reduction cost increase than the equal point; in
this case, the country can sold the emission right, while, if the
margin reduction cost decrease than the equal point, in this
case, each country demand the emission right that reflects the
demand side. Then, the market mechanism for the emission
right based on the price market.
Thirdly-the initial view about the allocation plans for emission
allowance:
20 - Harro V.A, Project title: Adaptation and Mitigation Strategies: Supporting European Climate Policy: Study on
the effectiveness of the EU ETS, 2009,P 19, Electronic copy available at: http://ssrn.com/abstract=1596892.
21 - Ibid,p19.
22 - Umberto C. - Alessandro L.- Francesco P.,op cit,P3.
5

The first step to implement the emission trading is the value of
emission right; there are three methods to determine this
value,23 the first is auction of emission reduction certificates at
the beginning phase trade, the second is The free allocation for
the cost for the emission right under the grandfathering which
is Based on historical data of emissions, the third, the free
allocation of the cost of emission rights on the basis of distinct
source that can be referenced under the benchmarking. In
according to the option rule, in case of ex-post adjustment,
emission right unused is not estimated market price or cost
during the period of a compliance and available for the future
use at the, but, it integrates the emission right price at the
price of the product then result in a wind fall profits.24
In addition, the most common method without the ex-post
adjustment in the first period trade is the grandfathering from
2005 till 2007, also, according to this method the value of
emission right is calculated by multiple the quantity of emission
allowance based on the historical emission data by the factor in
the specific period compliance.25 Emission right allocates also
based on the prediction of production or in a way fuel
dependent benchmark In the light of the best available
technology.26
The researcher conclude the view above that there is
initially three types of allocation methods to plan for
the implementation of emissions trading, the first
method is auction the allowance for a maximum of
emission, the second method relies on previous data
annual or is called grandfathering, or the third method
relies on alone source is on the basis of comparative
access to the best allocation or is called a method
benchmarking.
23- Ibid, PP72-73.
24 -Ibid.
25 -Ibid.
26 -Ibid.
6

The implementation of emissions trading is through cap and
trade program, which aims to clean up the air, and more
precisely, the government defines cover or a maximum for
each pollutant according to organized sources during the fixed
period of accountability or a compliance, this cover is divided
into allowances emission, and each allowance represents a unit
of pollution that is a tradable emission right.27 At the end of
accountability, each pollutant must offer a sufficient number of
emission allowances to cover the units of pollution that result
from him/her. Taking into account that the annual allowance
can be determined according to the life cycle of the program.28
In addition, there are many29 kinds of a cap and trade
programs as well as the United States Acid Rain Program, Los
Angeles Regional Clean Air Markets, the Chicago Emissions
Reduction Market System, and Phase one of the European
Union Emissions Trading System, one of the objectives of the
EU ETS for emission trade is to assist the government of the
United Kingdom in the coverage of goals at the international
and regional level. It means that the EU plan for trade in
emissions achieved a reduction in emissions by twenty percent
in 2010 and also achieved a reduction of two percent in
addition to the previous reduction during the period from 2008
to 2012 and is consistent with the requirements of the base
year of the Kyoto Protocol in 1990.30
In addition, there is sulfur dioxide sixth program, which
allows to companies effectively to continue and complete the
environmental requirements through two alternative two,
firstly: that a company invests in clean fuel, uses control
pollution technology and manages the demand for them, and
the evolution in technology transfer from one place to another,
27- Lesley K. M., The Over allocation Problem in Cap-And- Trade: Moving Toward Stringency, Columbia Journal
of Environmental Law, Vol. 34:2, P398, 2009, electronic copy available at: http://ssrn.com/abstract=1276405.
28 -Ibid.
29 - Lesley K. M., op cit, P397.
30 - Fredrik V.M- Peter S.,Climate Policy, Ecological Modernization and the UK Emission Trading Scheme,
European Environment, 2005,p146. Published online in Wiley InterScience (www.interscience.wiley.com).
7

secondly: a company buy additional emission right from a
company which has high techniques and works to reduce
emissions unusually, and then the company has the low
technology facing the environmental obligations with the lower
cost to their consumers.31
EU ETS can be defined as a permitted system which consists
of cap and trade, also it requires getting companies a sufficient
permitted number which is enough to cover the actual their
emissions of carbon dioxide, at the beginning of each year,
each participant or a company receives allowances emission,
which is an initial allocation that grant free or participant can
buy this allowance through auction.32 From an economic point
of view, it is expected for emission trading plan that helps
companies to reach sufficient gains to cover the limit emission,
and it can be said that, the companies seek to reduce their
emissions with least cost, then they have an incentive to sell
their surplus of permitted or right emission to achieve a profit
unlike the companies that reduce their emissions with the
highest cost.33 The first phase of the European Union emission
trading scheme in 2005 to 2007 and this plan leads to excess
allocation especially for the countries of Eastern Europe, and
this is due to a number of unused emission rights, then they
achieve unusual gains from their sale.34
Fourthly-the theories which dealt with emissions trading:
There are some theories that explain the concept of
emissions trading as a relatively new subject, which are the
economic theory, and the contribution of public choice theory,
explain these theories as follow:
31 - Richard S.- Michael W.- Alice L., Creating a Market for Carbon Emissions: Gas Industry Opportunities,
Environmental Market,1999,PP6-7,available at www.willy.com.
32 - Joachim S. – Karl M.- Christian H.- Stefan S., Generous allocation and a ban on banking – implications of a
simulation game for EU emissions trading,a chapter of book, Emissions Trading and
Business,2006,P394,available at www.willy.com.
33 -Ibid.
34 - Milan S.- Vojtech M.,Market-Based Instruments in CEE Countries :Much Ado about Nothing,a chapter of
book,Environmental Taxes and Fiscal Reform,Central Issues in Contemporary Economic Theory and Policy,ISBN
978-0-333-71464-5,2013,P67.
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Firstly-emission trading from an economic point of view:
Emissions trading may be considered under economic theory as instrument
environmental policy with the efficiency and efficient.35 Economists seek in the evaluation of
environmental policy tools compared to the standard of efficiency and standard sufficiently
either static or dynamic. Under the efficiency criterion, the emissions trading consider as a
tool Policy environmental that helps to reach the targeted reduction. It means that with
emission trade, the government determines the total amount of emission as essential level
that the company should not increase it. Also, this level is called the cover or cap and it
requires access the sufficient supervision by the government. In addition to the above, it may
be regarded as a trade plan in an allowance emission as a tool effective if the plan verifies
basically the desired result, when, the allowance emission is insufficient with the lack of
demand for it, credit emission would be created more than required, then the companies can
buy these credits from the clean development market or joint Implementation market.36
While, under the efficiency standard which is divided into
two kinds, the first: static efficiency, it means the target
emission reduction should be achieved with the possible lower
cost, by the note that if the abatement cost increases till the
company consumed the tradable emission rights, in this case,
the company buy the additional emission right from carbon
market, unlike, if the company could decrease the abatement
cost, the company uses its surplus emission rights, and it
requires enough participants in the carbon market.37 The
second, the dynamic efficiency standard indicates to Standard
motivation or incentive to more investment with the decrease abatement
cost, where this incentive plays role towards the promotion of
innovation processes that contribute to reducing emissions.38
Thus, under the economic theory, there is the path
dependence theory; this dependence may be defined as
Situations which decision-making processes based on the
35 - Heinrich T.- Jan Z., Business and emissions trading from a public choice perspective – waiting for a new
paradigm to emerge, a chapter of a book, Emissions Trading Institutional Design, Decision Making and
Corporate Strategies,2008,PP42-43.
36 - Jon B.S, EU Emissions Trading: Legitimacy and Stringency, EU Emissions Trading, Environmental Policy and
Governance,PP 295–308 (2010),p10.www.willy.com.
37 - Heinrich T.- Jan Z.,op cit,P42.
38 -Ibid.
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choices and events that appear early.39Also Mahoney40 defined
the pass dependence as possible output may be achieved
based on early events and conditions which could not predict
under new economic theory. In according to Edwin200441 under
the path dependence there are some differences between the
allowance or permit emission and the credit such as clean
development mechanism or joint implementation, these
differences may be mentioned as follows: in the permit system
government sets an upper limit of emissions that companies
must restrict it, with the limit the companies could exchange
them these allowances, while the credit emission system, In
case if one of the companies was able to reduce their emissions
to the baseline, a company can sell this permit to another, in
addition to that the permit system is effective and efficiency,
unlike the emission credit system which is a low effective and
efficiency.
Furthermore, the permit or allowance system
characterized42by some features as opposed to the
environmental policy systems, these features represents the
allowance emission system achieves first: cost effectiveness, in
other words, it allows for sufficient allocation of emission
allowances which is equal with the margin of the cost reduction
which leads to the fixed efficiency.43
More precisely, if the polluter could achieve the less margin
cost reduction and reduce its emission, then the polluter can
sell its additional emission rights, while if the polluter achieve a
high margin cost reduction that leads to avoid an additional
investment to buy the allowance or right emission.44 Second:
39 - Edwin W., Path dependent climate policy: the history and future of emissions trading in Europe, European
Environment, (2004), P263, available at(www.interscience.wiley.com).
40 - Mahoney J., Path dependence in historical sociology. Theory and Society,2000, PP 507–548.
From :Edwin W.,Ibid.
41 Edwin W.,op cit,pp267-268
42 - Harro V.A.,op cit,P20.
43- Ibid.
44 -Ibid.
10

this system motivates companies to use a technological
innovation to reduce their emissions, third: this system is
flexible, which helps every pollutant that reduce its emissions
at the lowest cost as possible in any geographical location
within the scope of emissions trading plan, and the polluters
should be to reduce their emissions either they use new
technology or to invest in other places.45 Fourth, in addition to
the previous advantages of this system that is characterized by
its effectiveness and predictability: under the theory guarantee
the certain authority can be able to determine the limit of the
tax on the emission that result from users plan emissions
trading that helps the authority to achieve their environmental
requirements, with this limit tax, every pollutant has the
flexibility in reducing its emissions to the point of equal
between the rate of tax and the margin cost abatement.46
Secondly-emission trading from the contribution of public choice
theory:
Although of this theory take all diverse groups into account,
but it depends on the assumption of economic relatively
modern and represented by some policymakers who are selfish
and short-term planning, this besides that under this theory still
some policy tools bureaucratic environment is based the
command and control system.47
45 -Ibid.
46 -Ibid.
47- Heinrich T.- Jan Z.,op cit,P44.
11