CO2 emission taxation has in general failed in the EU. Even a potential CO2 tax with full refund is hardly politically feasible because the few and large capital-intensive "losers" will oppose it more strongly than the numerous and small "winners" will promote it. The grandfathering of CO2 permit rights may alternatively be the politically and administratively most feasible solution for regulating CO2 in the EU for three reasons: First, no revenue needs to be redistributed. Second, the institutional structure in the EU allows that a permit market, as a non-fiscal measure, may be settled by majority rule. Third, the free-rider problem may be overcome by allocating a relatively larger amount of permits to troublesome EU members than their historical emission levels qualify them for. Based on the experience of the US Acid Rain Program, a suitable starting point for a potential CO2 market in the EU could be the electric utility industry as regulated by the European Environment Agency in Denmark. This new model may be considered in the US as well.
Environmental Policy and Governance, 1998, Vol 8, p. 121-28
European Union; CO2 market; Electric Utilities; United States; Public Choice; Grandfathering; CO2 tax; Fiscal; Majority rule; Free-riding