Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 02-3: The political economy of a tradable GHG permit market in the European Union

Peter Markussen , Gert Tinggaard Svendsen () and Morten Vesterdal
Additional contact information
Peter Markussen: Department of Economics, Aarhus School of Business
Gert Tinggaard Svendsen: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Morten Vesterdal: Department of Economics, Aarhus School of Business

Abstract: The EU has committed itself to meet an 8% greenhouse gas (GHG) reduction target level following the Kyoto agreement. Therefore, the EU Commission has just proposed a new directive establishing a framework for GHG emissions trading within the European Union. This proposal is the outcome of a policy process started by the EU Commission and its Green Paper from March 2000. The main industrial stakeholders all had the opportunity to comment on the Green Paper and from their positions we will analyse how far they are winners or losers compared to the final directive proposal. Here, we find that the dominant interest groups indeed influenced the final design of an EU GHG market. This industrial rent-seeking most prominently lead to a grandfathered permit allocation rule like the one found in the US tradable permit systems.

Keywords: Rent-seeking; European Union; political economy; Kyoto protocol; greenhouse gases; permit trading; grandfathering

JEL-codes: H20; H40; Q28

22 pages, January 1, 2002

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