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

Abstract: Has the EU Directive Proposal on CO2 trade been influenced by lobbyism and can it be improved? After hypothesizing how the EU may be vulnerable to lobbyism and why industrial groups have a strong incentive to lobby for favourable environmental regulation, we turn to empirical evidence concerning design. Here, it is possible to measure lobbyism as the difference in proposed design between the Green Paper (before lobbyism) and the final Directive Proposal (after lobbyism). Overall we suggest that this lobbyism affected the design of the EU CO2 market in favour of small-sized and well-organised industrial interest groups at the expense of the EU tax payers. Most critically, allocation of permits and enforcement issues are to be dealt with at the member state level rather than the supranational level allowing member states to favour their domestic industries. A likely market breakdown means less economic growth in the EU because the gains from free trade of greenhouse gas permits among firms in different member states disappear. Therefore, we discuss, based on the US emission trade experience, how the current design proposal can be improved.

Keywords: Lobbyism; CO2 trade; European Union; political economy; Kyoto protocol; burden sharing; grandfathering; auction; enforcement

JEL-codes: H20; H40; Q28

16 pages, December 1, 2002

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