Emissions Trading Hybrids: The Case of the EU ETS

Woerdman, E. & Nentjes, A., 31-Mar-2019, In : Review of Law and Economics. 15, 1, p. 1-32 32 p.

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We argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-and-trade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading ‘Hybrid’ (which we therefore label as ‘EU ETH’).
Original languageEnglish
Pages (from-to)1-32
Number of pages32
JournalReview of Law and Economics
Issue number1
Early online date5-Mar-2019
Publication statusPublished - 31-Mar-2019


  • emissions trading, EU ETS, economic efficiency, Cap-and-trade, Performance standard rate trading, Carbon leakage, CARBON LEAKAGE, POLLUTION, ALLOCATIONS, STANDARDS, PERMITS, PROTECTION, EFFICIENT, MARKETS, ENTRANT, PRICES

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