Should farmers participate in the EU ETS? Permit price, measurement and technology

Farmers in the EU do not trade greenhouse gases under the Kyoto agreement. This is an empirical puzzle. Should farmers participate in the EU Emission Trading System (ETS) for greenhouse gases (GHG)? Our overall answer is yes. First, farmers may harvest private net gains because of i) relatively low marginal reduction costs, especially within organic farming; ii) the avoidance of future losses in productivity as a victim of climate change; and iii) the possibility of receiving a favourable allocation system, such as grandfathering or a list of projects that release free allowances. Second, market consequences in terms of the effect on permit price and technology are overall positive, yielding a promising future for the inclusion of agriculture in the EU ETS. Finally, we propose a scheme for including the farming practices in the EU ETS that reduces the uncertainty from measuring emission reduction in this sector

A project-based system for including farmers in the EU ETS

Farmers in the EU do not trade greenhouse gases under the Kyoto agreement. This is an empirical puzzle because agriculture is a significant contributor of greenhouse gases (GHG) in the EU and may harvest private net gains from trade. Furthermore, the US has strongly advocated land-use practices as ‘the missing link’ in past climate negotiations. We argue that farmers have relatively low marginal reduction costs and that consequences in terms of the effect on permit price and technology are overall positive in the EU Emission Trading System (ETS). Thus, we propose a project-based system for including the farming practices in the EU ETS that reduces the uncertainty from measuring emission reduction in this sector. The system encourages GHG reduction either by introducing a new and less polluting practice or by reducing the polluting activity. When doing so, farmers will receive GHG permits corresponding to the amount of reduction which can be stored for later use or sold in the EU ETS

Hot air in Kyoto, cold air in The Hague

Why did the climate negotiations in The Hague fail? Our contribution is to argue that the conflict between the European Union and the United States stems mainly from disagreement on the cost issue. We argue that three main concerns promoted by the European Union in The Hague, i.e. a 50% national emission ceiling (the supplementarity principle), the use of carbon sinks and an international market control system, can be solved by less restrictions on free GHG trade and by establishing the World Trade Organization as an international authority. Because the US face much higher future reduction costs than the EU, the US will be imposed considerably higher costs than the negotiations in Kyoto were based on. Thus, to make the US stay in an international GHG emission- trading scheme, the EU must reconsider and acknowledge US claims for cheaper reduction options and the right to trade ‘hot air.’ This point is important. If the US do not participate, the increase in emissions will be much higher than the emission reduction following the EU supplementarity proposal.Hot Air, Global GHG Trade, Kyoto Protocol, The Hague, National Emission Ceiling, Carbon Sink, Control System, Cost Issue, EU, US.

Rent-seeking and grandfathering: The case of GHG trade in the EU

The EU Commission has recently proposed a new directive establishing a framework for greenhouse gas (GHG) emissions trading within the European Union. The idea is to devalue the emission quotas in circulation by the year 2012 at latest, so that the EU will meet its Kyoto target level of an 8% GHG reduction. Our main question is whether the final choice of allocation rule can be explained by potential industrial net winners involved in the policy making process. We answer this question by using rent-seeking theory and by analysing the Green Paper hearing replies from the main industrial groups. In other words, we want to explain and observe how rent-seeking (or lobbyism) affects the de-sign of environmental regulation and energy policy in favour of well-organized industrial interest groups. We argue that some firms are likely to reap a net gain from being regulated by a grandfathered emission trading system. This is so be-cause total costs of emission reduction and lobbyism are likely to be smaller than the total rents from having this type of regulation.Rent-seeking, lobbyism, grandfathering, greenhouse gases, Kyoto Protocol, emission trading, EU

The Political Economy of Climate Change Policy in the EU: Auction and Grandfathering

Based on the political support function model by Hillman (1982), we consider the choice of policy instruments in environmental regulation. More specifically, we extend the Hillman model so that it can incorporate the connection between the relative strength of lobby groups, the chosen level of regulation and the choice of instrument to facilitate the achievement of this level. We apply this model to explain the shift from auction to grandfathered emission trading in the EU. When explaining this shift in policy, we focus on climate change policy and the three main interest groups, namely industry, consumers and environ-mentalists. From a pure economic point of view, taxation or auctions are clearly preferable to grandfathering. However, from our political economy model, the opposite conclusion might emerge, suggesting the counter-intuitive result that grandfathering, compared to taxation and auction, might give a stronger pres-sure to increase the emission target level.Political support function, political economy, environmental regula-tion, lobbyism, rent-seeking, taxation, auction, grandfathering, emission trad-ing, European Union, interest groups, industry, consumers, environmentalists

Fighting windmills? EU industrial interests and global climate negotiations

Why has the EU been so eager to continue the climate negotiations? Can it be solely attributed to the EU feeling morally obliged to be the main initiator of continued progress on the climate change negotiations, or can industrial inter-ests in the EU, at least partly, explain the behaviour of the EU? We suggest that the EU has a rational economic interest in forcing the technological develop-ment of renewable energy sources to get a first-mover advantage, which will only pay if a sufficient number of countries implement sufficiently stringent GHG reductions. The Kyoto Protocol, which imposes binding reductions on 38 OECD countries, implies that, as a first-mover, the EU will be to sell the neces-sary new renewable technologies, most prominently wind mills, to other coun-tries, when they ratify and implement the Kyoto target levels. In the latest EU proposal made in Johannesburg, the EU pushed for setting a target of 15% of all energy to come from sources such as windmills, solar panels and waves by 2015. Such a target would further the EU’s interests globally, and could ex-plain, in economic terms, why the EU eagerly promotes GHG trade at a global level whereas the US has left the Kyoto agreement to save the import costs of buying the EU’s renewable systems.First mover advantages, Wind mill industry, greenhouse gases, Kyoto Protocol, EU

The Survival of the Nordic Welfare State and Social Trust

Why does free riding not escalate in the universal Nordic welfare state? How is it possible to maintain such a cooperative equilibrium where most people tend to cooperate? Our model suggests that the “missing link” is the accumulated stock of cooperation norms in terms of social trust. Arguably, a sufficient number of norm enforcers facilitate this unique collective insurance system.

Is local participation always optimal for sustainable action? The costs of consensus-building in Local Agenda 21

a b s t r a c t Is local participation always optimal for sustainable action? Here, Local Agenda 21 is a relevant case as it broadly calls for consensus-building among stakeholders. Consensus-building is, however, costly. We show that the costs of making local decisions are likely to rapidly exceed the benefits. Why? Because as the number of participants grows, the more likely it is that the group will include individuals who have an extreme position and are unwilling to make compromises. Thus, the net gain of self-organization should be compared with those of its alternatives, for example voting, market-solutions, or not making any choices at all. Even though the informational value of meetings may be helpful to policy makers, the model shows that it also decreases as the number of participants increase. Overall, the result is a thought provoking scenario for Local Agenda 21 as it highlights the risk of less sustainable action in the future