The Arhus School of Business M.Sc. in EU
Business & Law
Emission Trading Lobbying in the EU
Submitted by: NerijusProgram: M.Sc. EU Business & Law
Term: Fall Semester 2004
Student ID:
E-mail: knerkus@yahoo.comSupervisor: Gert Tingard Svendsen
Associate Professor, PhD (Econ.)
Department of Economics
Table of Contents
1. Introduction 2
1.1 Background 3
1.2 Statement of the problem 3
2. Theory (lobbyism) 4
3. Why would have interest to lobby? 5
4. Lobbying 8
4.1 The idea is debated 8
4.2 Proactive attitude helps 10
4.3 The drafting stage and implementation 10
Conclusions 13
Literature: 15
1. Introduction
Global warming is one of the most challenging threats that the
mankind has been facing for the last two decades. The Earth’s surface
temperature has reached its highest in the last millennium, the
precipitation patterns are changing, the see level is increasing, the
glaciers are melting, the extreme weather events have become more frequent
and severe.
Even though, the causes and consequences of global warming are
still disputed by some parties, in general scientists agree that it is
caused by the emission of greenhouse gasses and principally by carbon
dioxide (CO2) which stems from burning fossil fuels (coal, oil and gas). Of
course, other factors of human activities such as deforestation,
agricultural activities come in to play as well.
Unfortunately, the greenhouse gases impact is global and those
countries that suffer most have well underdeveloped industries and
contributed significantly less compared to the major rich ‘culprits’. Thus,
climate policy is very much linked to equity and international climate
process takes notice of that. So, it seems fair that major world economic
powers with the EU leadership take initiative to combat global worming.
Despite this overreaching threat, solutions to tackle the problem
are not that easy to implement. The environmental organizations and
increasingly conscious populations of states are those agents that bring up
the problem and exert the pressure on their governments to act on it by
implementing environment friendly policies. The political process reflects
these pressures in those countries where environmental awareness is high,
such as Germany and Scandinavian countries have been the forerunners in
pushing for action to be taken (Pedler, 2002). Apparently, climate
policies are not environmental policies any more – they are pure economics
as there is strong involvement industrial part. The cost at stake is of
significant importance to the industrials and societies in whole. As
industrials claim, introducing drastic environmental solutions to reduce
CO2 emission implies incurring substantial cost, thereby jeopardizing
economic growth and prosperity. So industrials take initiative – the
political reaction to introduce EU wide energy tax was massively opposed by
fossil fuel producers and many industrial groups. In this way the
bureaucratic incentive to tax was counterweighted by industrial interests
(Svendsen, 2003). To find the solution the EU Commission had launched the
Green Paper (CEU, 2001a) initiating the discussion on greenhouse emission
trading that eventually led to producing the Directive Proposal (CEU,
2001b) and the final Directive (CEU, 2001c).
1.1 Background
The first initiative to combat climate changes started in 1991 when the
EU Commission introduced first Community Strategy to limit CO2 emissions
and improve energy efficiency. The initially suggested measure was to
introduce taxation on the CO2 emissions. But it turned out rather difficult
to implement due to the strong opposition by industrials and voting rules
in the EU for the introduction of common CO2 tax (the unanimity rule for
fiscal measures, Art. 175 of the Maastricht Treaty) has failed as CO2
taxation implies fiscal character (Svendsen 2003). Thus, in response to
European Climate Change Program launched by the Commission in June 2000, a
decision to introduce a permit market, which is an integral part of the
Program, seems to be a feasible solution because it must be settled upon by
qualified majority meaning that no single member state can object the
implementation of the Directive Proposal.
According to the final Directive CO2 emission trading allows companies
to trade emission permits that have been allocated on historical basis
(grandfathered emission allowance based on the levels in 1990). The trade
takes place if cutting in CO2 emission is too costly rather than buying
permits on the market. A permit is the right to emit one tone of CO2. Once
the permit has been used, it will be withdrawn from the market in
compliance to the reduction level. The idea is that the aggregate emission
level is reduced to agreed levels, but this reduction takes place where it
cost least to do so.
According to the Kyoto protocol the EU committed itself to meet 8%
greenhouse gas reduction during the period 2008-2012 in comparison with
their
levels in 1990 In practice, this implies an estimate reduction of 14%
compared to ‘business as usual” forecast (CEU, 2001b) . The Kyoto Protocol
emission trading is planed to “kick off” in 2008. For this purpose the EU
Commission has introduced the Directive establishing a framework for CO2
trading within the EU (CEU, 2001c). Together with other policies and
measures, emission trading will be an integral and major part of the
Community’s implementation strategy. The Directive is the final outcome of
the process that was initiated by the Commission when it introduced The
Green Paper and had numerous dialogs with parties concerned. This framework
should be operational in the year 2005 subsequently leading to the
reduction of CO2 emission by the year 2012.
1.2 Statement of the problem
Among other forms of allocation of CO2 quotas the Green Paper states
that auctioning-off permits is technically preferable, gives full
transparency to the emission trading, fair competition among incumbents and
new entrants. But, as it can be seen from the final Directive the optimal
solution of auctioning-off the permits was politically unattainable as it
was the case in introducing uniform CO2 tax across EU. The upshot off all
this deliberation process is that from 2005 to 2008 all Member States will
allocate 95% and 90% for the period of 2008-2013 allowances to
participating installations for free of charge. (CEU, 2001c). That is, the
core principle is chosen to be grandfathering and for auctioning allocation
is left only a marginal part. That implies that this is a clear victory of
industrials as rent gains are obvious for participants of the CO2 market.
This paper concerns the interaction between policy makers and interest
groups in the process of introducing the emission trading within EU. The
Lafarge case can be useful example of how interest group pursues its
objectives in affecting the EU legislation in the emission trade area. The
main question I will attempt to answer is how the concerned interest group
influences the EU decision making progress and to what extent the final
Directive reflects the influence of this lobbying group.
2. Theory (lobbyism)
As institutional theory suggests, the way the interest groups act to
achieve their goals is determent by institutional set up of any political
entity, in this case EU. It can be assumed that both political and economic
agents interact towards well specified utility function, while at the same
time being constrained by the institutional setup to regulate this
interaction. In other words, the valuation of the process determining
political decision trend can be based on utility-maximizing behavioral
assumption of economics. (Svendsen, 2003, p.6) The institutional setup in
EU is highly dynamic, complex, multi-level and consensus building
orientated, and thus this complexity provides a variety of formal and
informal channels trough which the interest groups can influence the
decision making.
Lobbying in the EU institutions is not possible without thorough
understanding of how they work, what their competences are and were sources
of power and action are located. Two out of the three pillars on which EU
is based on are quite resistible to the influence from the interest groups.
That is: common foreign and security policy and police and judicial co-
operation in criminal matters. This intergovernmental playground featured
by the European Council or the Council of Ministers is relatively closed to
lobbying. The only way to influence these policies is by getting around and
exerting pressure on national government domestically or internationally.
Obviously, the EC pillar provides the greatest potential to lobby the
EU institutions because it comprises the big share of the Union’s
regulative policies including environmental. The main institutions that
attract lobbyist’s attention are: The Commission, The Council, The European
Court of Justice, The European Parliament and the Economic and Social
Committee. The magnitude of influence applied on these institutions depends
on their political powers receptiveness to initiate, draft and finally
approve and implement regulations EU wide (Cini, 2003).
My point is to make the inductive analysis how lobbying pursued by
certain interest groups fits in the theoretical framework of lobbyism
conducted at the EU level.3. Why would have interest to lobby?
As it has been noted, the Directive (CEU, 2003a), proposes CO2 emission
trading based on grandfathering system which was preferred by industrials
to auctioning allocation. In theory, allowing companies to trade emission
permits cuts the cost of compliance overall. If it has an emission cap, the
benefits of trading from a company’s point of view are clear, since it can
purchase a permit representing a tone of CO2 if it costs less than the
company’s own cost of reducing a tone of CO2. So the emission cut takes
place were it cost least to so while the overall reduction of emission is
the same. According to Svendsen, in this system the winners are all
existing firms because the permit limits are granted for free on historical
levels, whereas the looses are future firms
have to by all their
permits from existing firms. The loser is also the society assuming that
proceeds raised from auctioning by governments could be redistributed in a
number of ways to enhance social welfare. It could be argued that the
grandfathering systems is detrimental to new entrants by questioning equal
distribution in Member States, by enhanced accessibility to capital as
incumbents are granted a realizable asset, by threat of exercising market
power by incumbents (CEU, 2001b),
Even more, Svendsen argues that grandfathered regulation is
economically advantageous for incumbents even compared to the situation
without any CO2 regulation, let alone compared to CO2 taxes (Svendson,
2003, p.105-106) where it claims that total reduction cost and lobbying
cost possibly be lower than the rent from grandfathering and thus, net gain
from trade.
The paper by Svendsen (Svendsen 2) also clearly indicates the potential
‘losers’ and ‘winners’ (respectively households and industrials) when
choosing between grandfathering and auctioning permits in the EU. The