Task: part of the ENTRACTE research project
Emission trading is often seen as superior to command-and-control policy instruments. Markets for environmental resources aggregate information leading to the formation of prices, providing valuable insights about the costs of compliance to regulators. Moreover, market based instruments ensure that costs of meeting a given target are minimised.
Today, transferable quotas have advanced from being a textbook recommendation to being an important policy instrument. The EU ETS is a remarkable example. However, the implementation of the EU ETS faced its own set of problems and challenges, which will be explored in this task. In particular, we will investigate three major factors that can impair the correct functioning of a transferable quota system such as the EU ETS: (i) market power, or concentration, in the output and permit markets; (ii) extreme permit price and compliance cost outcomes; and (iii) market abuse and failure.