Edited by Jürgen G. Backhaus
Chapter 24: Tradeable Emission Rights
24 Tradable emission rights Edwin Woerdman Introduction Traditional instruments for environmental regulation are emission standards and taxes. An emission standard, also referred to as ‘command and control’, deﬁnes the maximum amount of emissions of a certain pollutant or the maximum amount of emissions per unit of output or energy. An emission tax sets a tax rate on emissions to achieve a predeﬁned emission level. Although both types of legal instruments to control environmental pollution are still being used in various – but certainly not all – areas of environmental policy, they have also met with increasing opposition from policy makers, managers and scholars, with economists at the fore. Taxes and energy efﬁciency standards, for instance, have been criticized for being not only too costly and rigid for ﬁrms, but also too ineffective for governments, because it is not clear how high the tax or energy efﬁciency rate must be set to achieve the national emission target. Moreover, high costs and low effectiveness endanger the compliance of governments with internationally agreed emission levels. To facilitate cost savings, increase ﬂexibility and strengthen compliance, a relatively new instrument is beginning to ﬁnd its way into environmental law: tradable emission rights. Emissions trading, as it is also referred to, originates from the United States (US), but the instrument is now also implemented in other parts of the world such as the European Union (EU). The idea is, simply, that it is cheaper for one polluter to reduce its emissions as required by...
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