You are supposed to analyse and critically assess the European Emissions Trading Scheme from an economics perspective. In this context, you should, for example, explore how the scheme has evolved over time and critically discuss whether and how changes that have been implemented over the years have addressed weaknesses of the scheme. You need to incorporate the relevant economic theory and apply it to the EU Emissions Trading Scheme. It is your responsibility to research the relevant information.
Different industries employ diverse production processes to produce products. These processes are sophisticated, and they translate inputs into output or product. However, an industrial activity not only produces products, which are then sold in various markets around the world, but also these industrial processes produce waste in large volumes, which impacts physical environment. All industrial activities have a toll on the environment, which why it has become imperative for countries to monitor production processes in different industries. The statistics, regarding the deterioration of the environment, have turned grim governments around the world, which have become more sensitive towards environmental deterioration caused by Industrial Activity (Audretsch, 2017).
Both developing and developed countries have devised environmental policies, which are implemented through different state institutions. However, we learn that not only these environmental policies differ from one another, but also the results they produce also differ drastically. For instance, developed countries, such as members of European Union, are more effective in implementing environmental policies; therefore, they can produce better results. Also, we also learn that environmental policies (such as European Emissions Trading Scheme), of developed countries, are more sophisticated and result-oriented. Furthermore, such mechanisms have been developed by industrial countries, which have eased the process of monitoring emission of greenhouse gases and waste material, which allows them to take better decisions (Sandbag, 2011).
Evidence suggests that economic or industrial activity has accelerated the process of environmental deterioration, which includes the emission of greenhouse gasses at an alarming rate. In the early phase, of Industrialization, deforestation occurred at a high rate and firms, which operated in these industries, also produced large volumes of waste, at industrial scale, of various types (The Guardian, 2011). However, as the environmental deterioration became more apparent, such as intense/harsh climate and increased in global temperature, governments became more sensitive and started to take major measures against environmental deterioration (Rinkesh, 2017). Statistics reveal that Carbon Dioxide emission increased dramatically in the 20th century as it is shown in the chart below (EPA.Gov, 2017).
We also learn that among all the greenhouse gasses, which are released by industries and other human activity, carbon dioxide has the largest share. Therefore, the most emphasis, of the government and state agencies that tasked to control environment deterioration because of various causes, is on reduce Carbon emission. The European Union has devised its policy and instruments to control emission of greenhouse gases and one such program, to regulate greenhouse emission, is the European Emissions Trading Scheme (European Commision, 2013). This program was introduced in the year 2005, which basic objective was to fight global warming, which has become a controversial subject since Trump has come to power. However, almost all major economic countries accept that climate change is real and it is affecting lives adversely (Borger, 2017).
The program, which is called European Emissions Trading Scheme, was launched in the year 2005 and the objective of devising this program was effective to combat undesired changes in global climate because of industrial and global activity. At the time of its introduction, it was considered a major pillar of the environmental policy of the European Union and an effective tool to slow the environmental deterioration to the point where it becomes insignificant. As per reports, more than 10, 000 industrial units and power plants or factories are covered by this policy (EPA.Gov, 2017).
This structure of the program is quite simple. An industrial unit is allowed to emit greenhouse gas of particular size/amount (cap) and those companies, which can emit fewer greenhouse gasses than what they are permitted to emit. They can trade their remaining allowance with other firms or companies, which have failed to regulate their emission or in other words which industrial activity causes more emission of a greenhouse gas than the allowance (Sandbag, 2011).
We also learn that this entire scheme is divided into some trading periods. The first of such trading periods started in the year 2005 and continued to the year 2007. The second such trading period started from the year 2008, and it ended in the year 2012. From the study of related literature, we know that the third, which has started in January of 2013, will end in the year 2020 (December). It must also be acknowledged that it is imperative for a company, which has breached its limit of carbon emission to buy allowances from the other companies, which have produced fewer greenhouses, which what they are supposed to produce. It suggests that firms can sell these allowances at any rate, which gives them the power to manipulate the prices of these allowances. It is a very good incentive/penalty for industrial units to re-access their internal production systems and appropriate them in such manner that they have 1) minimum toll on the environment and 2) keep the cost of production stable at the previous level at least (Carbon Trust, 2017).
There are several economic concepts at play. For instance, through this program, innovation is forced upon firms. Innovation, which is the desired quality, resulted from various factors. In a competitive market, where there are several firms competing with each other to sell their products, a firm can gain a competitive edge by bringing efficiency in producing a product or service, which reduces 1) cost of production, 2) adds more value to the product or both (Beggs, 2017). Therefore, competition, which is a market factor, can force upon innovation upon a firm (Audretsch, 2017). Similarly, non-market factors, such as greenhouse-emission regulation can force a company to take various kinds of innovative measures. In the context of the European Union, we know that European markets are highly competitive, which is why when the government enforces environmental laws, firms have to develop new methods of production. These methods do not only address environment but also keep costs in check, as we know that when cost increases, of producing a good or service, profit shrinks (in competitive markets).
In case of European Emissions Trading Scheme, the objective is to regulate production or industrial/economic activity in such manner that it does not have a large impact (adverse) on the physical environment (Climate Policy Info Hub, 2017). For instance, when industrial units will produce more greenhouse gasses than their given quota, it will have consequences for them, which will affect their profits. It must be recognized that for any industry or firm, which operates in an economic/corporate/industrial system, the ultimate or supreme objective is profit, and when the profit starts to dwindle, because of any reason, it takes extraordinary measure to maintain/increase it to the desired level (Muley, 2016). Therefore, to avoid penalties, in the form of buying allowances from other firms, firm focus inwards with more robustness and develop new methods of production, which 1) keep the cost of production stable or at the desired level, and 2) address the issues about the environment and productivity (Appunn, 2014). We also learn that innovation results evolution of firms, which imperative as evolved firms are better at exploiting limited resources and increasing volume of profits.
From the study of literature, regarding firms, we learn that the investment has a direct correlation with profit (Baker, 2013). Therefore, when profits start to dwindle, in a particular industry because of any reason, investment also starts to shrink. In case of EU’s environmental policy, all industries in the EU are affected by it. Therefore, when the cost increases profit dwindles, and this situation makes the investment. Therefore, many studies have been carried out to study the impact of the European Emissions Trading Scheme on 1) emission of greenhouse gases, 2) Profit and 3) Investment; especially in post-2007 economic conditions/scenarios (Ambrose, 2016).
Most of the studies have concluded that European Emissions Trading Scheme has been able to produce results, which it can present as a success. For instance, as per one study, the EU has been able to cut the CO2 emission up to 40-80 million tons on average, which is a considerable number. It also suggests that the European Union has been able to cut the greenhouse gas emission around 2-4% of total capped. However, the majority of the study fails to discern the nature of impact this scheme had on pricing and investment (Laing, 2014, p.511). However, these studies suggest that there has been strong empirical evidence in favor of the cost – pass-through in different industries, such as power-generation, diesel, and gasoline. The statistical evidence also suggests that there have been windfall profits, in particular, sectors of the economy; however, these windfall profits are concentrated in few extraordinarily large companies.
From these recent and comprehensive studies, on the impact of the European Emissions Trading Scheme on industries, we can deduce that this program has achieved its core objective; however, evidence, regarding Emissions Trading Scheme as a cause of innovation, is inconclusive. It does not mean that it is impossible to evaluate its other impacts, but rather it suggests that data regarding it is in not adequate and reliable (Climate Policy Info Hub, 2017).
Because of the structure of the program, it has failed, as per some experts, to truly achieve the desired objectives. The carbon-market, which it has created, is failing because of the oversupply of allowances that have crushed the market prices. It suggests that most of the firms, in the market, can reduce their emission of carbon and therefore, the market for the CO2 is imploding. Also, more allowances have been supplied, which is causing the prices to dwindle. As per one report, published in The Guardian, the price of emitting carbon dwindled around 45%, which is a sharp decline (in the year 2016 it was around €5 per ton). European Union devised many schemes and instruments to address this issue, which were linked to market structuring but failed to produce the desired results (Ambrose, 2016).
The stability of carbon price is essential to make carbon markets work more efficiently. The slow price recovery has also complicated the situation, and it is being projected that the market will rebalance only in the year 2030, which is still 12 years in the future. Experts assert that price must be more than €40 per ton so that it could encourage a switch to low carbon power generation. The real demand for carbon allowances is generated by power-generation industry based on fossil fuel. The mild winter in Europe has also played a part in impacting European Emissions Trading Scheme. Though, it is the oversupply of allowances, which has destabilized the market and decreased prices sharply (Sandbag, 2011).
In the end, it is concluded from the study of this subject; we learn that European Union’s Emission Trading Scheme can produce desired results; however, there is a need to overhaul that entire program. Brussels have once over-hauled the program; however, the price, of CO2 remains one of the major issues. In the year 2016, the price decreased sharply, and it caused serious challenges for the entire system. Experts have suggested that oversupply of allowances must be addressed to stabilize prices. It can be done by increasing the price of allowance and reducing its supply. It will directly and instantly impact European Emissions Trading Scheme, which is now considered the main instrument of the European Union to combat climate change. It is obvious that European Emissions Trading Scheme does not produced required results, but if this system is corrected and made more efficient, it may produce desired results in short time.
References
Ambrose, J., 2016. EU has ‘failed’ to save carbon market from long-term gloom, say analysts. [Online] Available at: http://www.telegraph.co.uk/business/2016/03/03/eu-has-failed-to-save-carbon-market-from-long-term-gloom-say-ana/ [Accessed 5 January 2018].
Appunn, K., 2014. Understanding the European Union’s Emissions Trading System. [Online] Available at: https://www.cleanenergywire.org/factsheets/understanding-european-unions-emissions-trading-system [Accessed 5 January 2018].
Audretsch, D.B., 2017. Innovation and Industry Evolution. [Online] Available at: https://mitpress.mit.edu/books/innovation-and-industry-evolution [Accessed 1 January 2018].
Baker, D., 2013. Profit and Investment: Does More of One Mean Less of the Other? [Online] Available at: http://cepr.net/blogs/cepr-blog/profit-and-investment-does-more-of-one-mean-less-of-the-other [Accessed 5 January 2018].
Beggs, J., 2017. What Constitutes a Competitive Market? [Online] Available at: https://www.thoughtco.com/introduction-to-competitive-markets-1147828 [Accessed 5 January 2018].
Borger, J., 2017. Trump drops climate change from US national security strategy. [Online] Available at: https://www.theguardian.com/us-news/2017/dec/18/trump-drop-climate-change-national-security-strategy [Accessed 5 January 2018].
Carbon Trust, 2017. EU Emissions Trading Scheme (EU ETS). [Online] Available at: https://www.carbontrust.com/resources/reports/advice/eu-ets-the-european-emissions-trading-scheme/ [Accessed 5 January 2018].
Climate Policy Info Hub, 2017. The EU Emissions Trading System: an Introduction. [Online] Available at: http://climatepolicyinfohub.eu/eu-emissions-trading-system-introduction [Accessed 5 January 2018].
EPA.Gov, 2017. Global Greenhouse Gas Emissions Data. [Online] Available at: https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data [Accessed 5 January 2018].
European Commision, 2013. The EU Emissions Trading System (EU ETS). [Online] Available at: https://ec.europa.eu/clima/policies/ets_en [Accessed 5 January 2018].
Laing, T., 2014. The effects and side-effects of the EU emissions trading scheme. Wiley Interdisciplinary Reviews, 5(4), pp.509-19.
Muley, R., 2016. Objectives of Business Firms. [Online] Available at: http://www.economicsdiscussion.net/firm/objectives-firm/objectives-of-business-firms/16948 [Accessed 5 January 2018].
Rinkesh, 2017. What is Environmental Degradation? [Online] Available at: https://www.conserve-energy-future.com/causes-and-effects-of-environmental-degradation.php [Accessed 5 January 2018].
Sandbag, 2011. What is the emissions trading scheme and does it work? [Online] Available at: https://www.theguardian.com/environment/2011/jun/07/ets-emissions-trading [Accessed 1 January 2018].
The Guardian, 2011. What are the main man-made greenhouse gases? [Online] Available at: https://www.theguardian.com/environment/2011/feb/04/man-made-greenhouse-gases [Accessed 5 January 2018].
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