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The EU Emission Trading Scheme

Aspects of Statehood, Regulation and Accounting

Series:

Stefan Veith

The emission trading scheme is the most recent instrument of the EU environmental policy. Its underlying mechanisms and economic consequences are yet less straightforward than policymakers initially had expected: As this study shows, the regulation probably yields unintended distributional effects and imposes additional risk on the regulated companies. Consequently, meaningful accounting for emission rights is not only a necessity for regulators and customers, who need transparency, but also for investors on capital markets, who bear the additional regulatory risk. This study empirically assesses the usefulness of various accounting alternatives and provides evidence that cost and fair value approaches dominate the widely used mixed models.

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2 Transformation of Environmental and Energy Policies in theEuropean Union 7

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2 Transformation of Environmental and Energy Policies in the European Union 2.1 Towards a Governance Framework for Policy Analysis Most existing emission trading schemes are based on a budget, which caps the pollution of a substance to a predefined volume per period. This budget is sub- divided into a number of tradable certificates, of which each carries the same allowance.1 At the end of the period, the regulated entities have to surrender the amount of certificates that corresponds to the physical emissions. Depending on the regulatory details, the regulated entity can receive the certificates by an agency in advance (by means of a free or a costly allocation) or it can purchase necessary or sell supernumerous units on designated exchanges during the pe- riod. This type of an emission trading scheme is usually called a cap-and-trade mechanism. Such an ETS deviates from a traditional regulatory policy, which relies on precise standards, or direct financial (dis)incentives. As a new policy mode it is at the same time preferred and criticised for its unique features. Supporters un- derline its economic efficiency (Stavins, 1998: 70-71), whereas critics regard it as intrusion of neoliberal ideas to environmental politics (Bailey, 2007: 530). The current debate on emission trading schemes and their comparison to other instruments is split into economic and political sciences schools of thought. The former strand of literature identifies an efficient, least cost approach – neglecting constraints arising from the instrument’s institutional setting. The latter focuses on its political and cultural embeddedness – largely...

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