Volume 6, Issue 3

This paper discusses fundamental aspects of the European emissions trading system which has been implemented in January 2005. We show how institutional features set by the EU Commission and the required subsidiary decisions by the respective Member States are potentially in conflict with the objectives of efficiency, compensation and competition neutrality. Inefficiencies can emerge from the decisions on the number of emission allowances and the way in which they are allocated. These problems are intensified by pressure from political interest groups. We argue that costs from recurring political debates and decisions on the National Allocation Plans could be avoided by using truly lump-sum-free allocation rules or moving towards auctioning off emission allowances.

Economists like trading systems: Efficiency gains can best be realized with flexible mechanisms. Also every economist knows that the institutional conditions and the rules of the game are important. This basic idea stood behind the introduction of a CO2-emissions trading system within the European Community starting in 2005. Since the starting point is the Kyoto-protocol with its subset of relevant states involved and the rules agreed upon there, one must ask whether the EU CO2-trading system is really an instrument that helps to reach the Kyoto goals more efficiently. A positive answer to this question is very doubtful. The new European subsystem is only valid for CO2 while Kyoto knows six greenhouse gases, the EU trading periods are 2005-2007 and 2008-2012 while Kyoto is only relevant for the second period, the integration with all flexible instruments of Kyoto is not guaranteed from the beginning. The plants involved are power plants and plants with high energy intensity. Since the technological levels of these plants are rather similar in Europe, the difference in marginal abatement cost will not be large enough to offset the rather high transaction cost of the special EU system. Furthermore, the heating systems and small scale plants of industry are not included in the trading system. The same holds true for traffic, households and the service sector. Drawing a borderline between CO2-policy there and the trading activities will cause inefficiencies. If CO2-prices are high, the main incentive of the trading system will be a large shift from domestic production to production abroad without any CO2-restrictions. Leakage-effects will then be dominant. With low CO2-prices the special European bureaucratic system will not create enough efficiency gains to cover the trading system’s cost.

The European system of tradable CO2 allowances is an important step towards implementing a market oriented environment policy. For the time being, the quantitative emission reductions defined in the National Allocation Plans (NAP) are still minor, but this outcome seems acceptable because institution building is of high priority during the first phase 2005-2007. Later, more ambitious emission reductions will follow. A closer look at the genesis of the NAP raises however some doubts about the future effectiveness of the new instrument. By analysing the CO2 allocation decisions in Germany the article shows that the greenhouse gas issue can today successfully be misused by politicians and interest groups towards achieving egoistic goals and it concludes that this did happen at the expense of the proclaimed environmental target. Due to the particular character of the greenhouse gas problem this diagnosis may hold as long as no socially and economically acceptable greenhouse gas abatement technologies have become available.

Analyzing the rationale for climate policy, one utility category is often neglected: secondary benefits. This is surprising because the consideration of secondary benefits would increase the attractiveness of climate policies from a national point of view. It would however also affect the behavior of states in international negotiations on climate protection. On the basis of a chicken game, it is argued in this article that secondary benefits support national incentives to behave cooperatively. International cooperation in climate policies thus becomes more probable.

Most observers ascribe the recent stagnation in Europe and her falling back behind the US-economy to insufficient and delayed deregulation and privatization, excessive social expenditure, a lag in new technology; some observers mention restrictive economic policy as well. The stagnation, however, affects the large countries primarily, while the northern ones tend to grow as fast as the United States. This study argues that one important explanation for the current economic problems is a strong worldwide trend towards uncertainty. The competitive edge of Scandinavian economies results from the fact that they managed to compensate this trend by a well-designed combination of education policy, technology policy, distribution policy and social policy. The US-policy succeeded primarily with expansive monetary and fiscal policy. The large European countries, in contrast, aggravated social uncertainty even more by an unsystematic and uncoordinated policy, so that the citizens, heavily afraid of reforms, rejected them forcefully.

This article discusses the ranking results by Keil and Huber (2004) and re-examines the publication activity of research institutes in the German-speaking area for the period 1989-2003. Placing special emphasis on the national visibility of the output measured by means of bibliometric methods as well as on a stringent selection of institutes, we fail to replicate and cast some doubt on the findings of the preceding study.

In contradiction to an article of Bo¨nte and Lucke published recently in this journal, this article argues that insufficient quality of commissioned economic research basically results from distorted quality control incentives both for contractors and clients and not from asymmetric information between them. As a remedy, a mandatory publication of studies commissioned by public institutions is recommended. Such an obligation would not completely eliminate distorted incentives, but its influence on research quality would probably be higher than the influence of a referee procedure as suggested by Bo¨nte and Lucke.