Emissions Trading Schemes

Markets, States and Law

Sanja Bogojevic

• Publisher: Hart Publishing
• Year: 2013
• Print ISBN: 9781849464055
• eBook ISBN: 9781782251668
• Edition: 1
• Topic: Law
• Subtopic: Environmental Law
• Index: Law

Over the last four decades emissions trading has enjoyed a high profile in environmental law scholarship and in environmental law and policy. Much of the discussion is promotional, preferring emissions trading above other regulatory strategies without, however, engaging with legal complexities embedded in conceptualising, scrutinising and managing emissions trading regimes. The combined effect of these debates is to create a perception that emissions trading is a straightforward regulatory strategy, imposable across various jurisdictions and environmental settings. This book shows that this view is problematic for at least two reasons. First, emissions trading responds to distinct environmental and non-environmental goals, including creating profit-centres, substituting bureaucratic control of resources, and ensuring regulatory compliance. This is important, as the particular purpose entrusted to a given emissions trading regime has, as its corollary, a particular governance structure, according to which the regime may be constructed and managed, and which trusts the emissions market, the state and rights in emissions allowances with distinct roles. Second, the governance structures of emissions trading regimes are culture-specific, which is a significant reminder of the importance of law in understanding not only how emissions trading schemes function but also what meaning is given to them as regulatory strategies. This is shown by deconstructing emissions trading discourses: that is, by inquiring into the assumptions about emissions trading, as featuring in emissions trading scholarship and in debates involving law and policymakers and the judiciary at the EU level. Ultimately, this book makes a strong argument for reconfiguring the common understanding of emissions trading schemes as regulatory strategies, and sets out a framework for analysis to sustain that reconfiguration.

1

From Uniformity to Legal Particularities
of Governance Regimes: Revising the
Framework of Analysis for Emissions
Trading Schemes in Law

I. Introduction

This is a study of environmental law scholarship and the way in which scholars¹ understand emissions trading as a regulatory concept. The aim that underpins this book is undeniably bold – I seek to challenge a certain vision and methodology applied in analysing emissions trading schemes that I take to be prevalent in environmental law scholarship. I intend to discard the generically uniform prism through which emissions trading tends to be projected and subsequently understood as a straightforward instrument that is based on common design features and thus imposable in public law from jurisdiction to jurisdiction to the same effect. In its place, I will set out a more pluralistic view of emissions trading, responding to diverse environmental and non-environmental problems – including creating profit-centres, establishing a governance regime aimed at substituting state control of common resources, and ensuring regulatory compliance – and as such, capable of establishing distinct governance regimes, each regime embedded in its own legal cultural and historical contingencies.

Analysing emissions trading schemes in their respective legal setting poses a methodological challenge that is central to this book. The challenge lies in accommodating emissions trading discourses that are intrinsically cross-jurisdictional, vastly interdisciplinary (albeit with overarching influences from economics), and continuously evolving in accordance with, or in differentiation to, the political climate, within a legal framework that rejects generalisations and mere technical portrayals of emissions trading schemes. The way in which this book responds to this challenge is by developing a methodology that ‘zooms out’ of emissions trading debates, and with an overview of these discourses, explores the type of environmental governance regimes that are furthered when emissions trading schemes are promoted. The current investigation shows that the understanding of emissions trading is mediated by three distinct and competing visions of how these trading schemes function or ought to function. As part of the analysis, I develop three models – the Economic Efficiency, the Private Property Rights and the Command-and-Control models – in which these portrayals are distinctly projected. According to the Economic Efficiency Model, emissions trading schemes function as a means of securing economic benefits, the Private Property Rights Model promotes emissions trading schemes as a substitution for central governance of common resources, and the Command-and-Control Model views emissions trading schemes as a neo-regulatory mechanism. These three visions, in turn, have as corollaries three different governance structures according to which a trading scheme may be constructed and managed, each structure conferring a different legal status upon the rights created in emissions allowances, whilst subscribing to competing visions of what role the state plays, or ought to play, in the construction and management of the emissions market.

The significance of this methodology and the models is to establish a new framework of analysis for emissions trading schemes in law that enhances the idea of emissions trading as distinct governance regimes, thereby rejecting any generalisations that suggest that emissions trading schemes are simple regulatory tools that may be used across jurisdictional borders with equal simplicity and to the same effect. The models show that each governance regime created by emissions trading schemes is deeply grounded in the roles that are ascribed to the state and the market in environmental regulation. Although the emissions trading discourse tends to be dichotomous in this regard,² the models highlight that the view of the state and the market are co-produced; that is, they exist in a symbiosis and the idea regarding the function of the one, directly affects the idea regarding the function of the other. At the heart of emissions trading debates, therefore, stands the legal dilemma of how and to whom to allocate regulatory power³ to decide on the construction and management of emissions trading.

It is important to note that the models form a theoretical framework of analysis that, as such, is incapable of determining what legal structures a particular emissions trading regime ought to take. With the intention of exploring the applicability of the models in law, and to show that the governance regimes underpinning emissions trading schemes can only be understood in the context of legal specificities, I examine the EU Emissions Trading Scheme (EU ETS) against the backdrop of the legal order of the European Union (EU). More specifically, this exploration surveys the EU ETS by focusing first on how law – and policymakers⁴ at the EU level, and second the Court of Justice of the European Union (CJEU)⁵ – reason and give meaning to emissions trading. This close analysis of policy-based and judicial discourses surrounding the EU ETS reveals a strong mismatch in the understanding of the rationale and functionality of the EU emissions trading regime as envisioned by the European Commission (Commission), the EU Courts and the litigants. Mapping the Economic Efficiency, the Private Property Rights and the Command-and-Control models onto the EU ETS judicial discourse helps to categorise and flesh out these discrepancies and show that competing visions of the construction, role and impact of the EU ETS exist and give rise to an ever-increasing case law. In effect, pointing to the multiple visions that exist in a single jurisdiction regarding an emissions trading scheme challenges the scholarly assumption that furthers emissions trading as a straightforward tool that can be applied across different legal settings with generic outcome. In its place, the case analysis unveils complex multi-level governance structures created by the emissions trading scheme in the EU jurisdiction.

The aim of this book is to undertake a positivist analysis of environmental law scholarship and explore the EU ETS with the intention of showing that emissions trading as a regulatory concept reflects different governance structures, which are dependent on their specific cultural context for meaning and implication. From the viewpoint of other established areas of law, this exercise is not novel; ultimately any control system is certain to create a particular governance structure that relies on its legal specification for content and impact. In environmental law, nonetheless, and especially with regard to emissions trading schemes, this approach is significant because environmental law scholarship has yet to develop a methodology that accommodates thorough legal analysis for emissions markets. The current nature and framing of environmental law scholarship instead induce discussions that overlook the impact of legal culture and encourage simplistic and generic portrayals of this particular regulatory mechanism.⁶ Understanding why environmental law scholarship is shaped in this manner involves reflecting critically and broadly on the nature, promise and deficiencies of this particular strand of scholarship. As such, this book makes an important contribution to environmental law more broadly, outside the domain of emissions trading debates.

This chapter provides a two-step introduction to this book. First, it briefly highlights the high profile of the use of emissions trading in environmental law and policy and environmental law scholarship, pointing to the common assumptions of the virtues of this regulatory control mechanism. This overview aims to orient the discussion on emissions trading but also to highlight the pressing need to revise the existing analytical framework through which these emissions trading schemes are viewed. In effect, it paints the general picture of the problem that this book addresses. Second, it outlines the particular methodology applied in this study, and explains how its application paves the way for a robust and mature framework of analysis for emissions trading schemes in law. Before starting, however, it is useful to introduce emissions trading with which this book is concerned.

Describing emissions trading in general terms is conceptually difficult, as each portrayal adheres to one particular governance structure that I intend to explore in chapter two. Thus merely as a brief introduction, one way of presenting emissions trading is to state that it is a scheme under which the government imposes a limit on the total quantity of emissions, issues allowances adding up to that total, and then allows emitters to buy and sell surplus allowances among each other.⁷ The idea is that this control system creates a clear incentive to reduce emissions and sell allowances at a profit. This formulation, however, is open-textured and on this basis different from, for instance, a rights-based view of emissions markets that sees the creation of a tradeable property right in emissions allowance as pivotal in the establishment of an emissions market. Dales explains this particular analysis:⁸

Because transferable (or full) property rights always command an explicit price, the establishment of such Rights makes it easy to establish a market in them. In turn, the buying and selling of the Rights in an open market and the consequent establishment of an explicit price for the right to discharge a ton of waste into water (or air) system results in a theoretically efficient allocation of ‘anti-pollution effort’ as between different dischargers. (Emphasis added).

Thus, in the view of Dales, transferable property rights in emissions (and water) rights are central in the construction of environmental markets, as it is through these that trading schemes in emissions allowances can be created in a straightforward manner. This view is again different from, for instance, a state-focused description of emissions trading where these trading schemes are defined as:⁹

[A] ‘command and control plus’ instrument, with often even stronger [than traditional direct regulation] government intervention and control, in particular in relation to monitoring of emissions, and high non-compliance sanctions.

The obvious distinction between this explanation, compared with the previous two, is the focus on the state rather than on market forces in managing the emissions trading scheme. This suggests that the core structure and function of emissions trading will differ depending on through which prism this regulatory strategy is viewed. Listing these descriptions is not to suggest that these portrayals are preferred, or in any way representative of particular formal explanations of emissions trading. Indeed these illustrations are set out in different jurisdictions, periods and contexts and as such unsurprisingly diverse.¹⁰ The fact that they, nonetheless, frame the conceptualisation of emissions trading differently, shows, as chapter two discusses, that in debating emissions trading, distinct governance regimes for pollution control are ascribed to.

II. Emissions Trading Schemes and their
High Profile in Environmental Law

Emission trading is not a novel regulatory strategy. The general principles underlying emissions trading are based on scholarly proposals put forward in the late 1960s as part of theories concerning the optimal solution to the allocation of resources to various commons.¹¹ Coase, belonging to this category of scholars, and known as the ‘grandfather of pollution trading’,¹² revolutionised the way in which pollution control is viewed by arguing that pollution is simply a factor of production, and that by turning it into well-defined, transferable legal rights, the market, as opposed to the government, can play a crucial role in the way in which pollution is regulated.¹³ This scholarly contribution, coupled with several other by now classic articles,¹⁴ comprise the foundation for theorising about market-based mechanisms, including emissions trading schemes in environmental law, and have subsequently helped inspire legislative action.¹⁵

In the five decades that followed the publication of Coase’s paper, the high profile of emissions trading schemes in environmental law and policy, as well as in environmental law scholarship, has thrived to the extent that it is impossible to debate regulatory choice for air pollution control without considering emissions trading regimes.¹⁶ Although a strong sentiment exists in environmental law for the need to apply a mix of regulatory mechanisms to environmental problems,¹⁷ emissions trading schemes, falling within the broader scope of market-based mechanisms,¹⁸ are widely considered ‘superior’¹⁹ to other direct regulatory options, and their application is furthered as an obvious choice ‘unless one can show they are somehow deficient’ (emphasis added).²⁰ From this angle, emissions trading is seen as ‘the holy grail of environmental policymaking’,²¹ and its use in environmental law and policy ‘close to politically correct’²² – a point that is illustrated throughout this book.

The profile of emissions trading schemes in environmental law has particularly flourished in recent decades due to the inclusion of emissions trading in international environmental law and as part of the Kyoto Protocol (Protocol), in which emissions trading scheme is suggested as a strategy that may be applied to meet quantified emission limitations and thereby comply with international emissions targets.²³ The earlier success of the so-called ‘acid rain program’ in the US,²⁴ which used emissions trading schemes to reduce sulphur dioxide, played a crucial role in the decision to place emissions trading at the centre of the international attempt to fight climate change²⁵ and make this regulatory option ‘fashionable’²⁶ as a control mechanism across various jurisdictions.²⁷ In EU environmental law, emissions trading is a ‘key trend’²⁸ and the EU ETS,²⁹ ...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Acknowledgements
• Contents
• Tables of Cases
• Table of Conventions, Treaties etc
• Table of Legislation
• Chapter: 1. From Uniformity to Legal Particularities of Governance Regimes: Revising the Framework of Analysis for Emissions Trading Schemes in Law
• Chapter: 2. Deconstructing Emissions Trading Discourses
• Chapter: 3. The EU Emissions Trading Scheme and the Importance of Legal Culture
• Chapter: 4. Unpacking EU Emissions Trading Discourses (I): The Commission
• Chapter: 5. Unpacking EU Emissions Trading Discourses (II): EU Courts
• Chapter: 6. The ‘Honeymoon’ in Environmental Law Scholarship
• Chapter: 7. Conclusions
• Bibliography
• Index