Emission trading lobbying in the EU anglu k
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Emission trading lobbying in the EU anglu k

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

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

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