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Brexit and the EU ETS

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Brexit and the EU ETS
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   Universität Hamburg Fakultät Wirtschafts- und Sozialwissenschaften Fachbereich Sozialökonomie Herr Dr. Prof. Grischa Perino The Economics of Climate Change SoSe18 Schriftliche Ausarbeitung The EU ETS and Impact of the UK Vorgelegt von Pedro Manuel Obregon Santander Matrikel-Nr. 6742185 Werderstraße 65 20149 Hamburg  1 Table of Contents 1.Introduction .............................................................................................................................. 2 2.Tools for making Climate Policies ............................................................................................... 2 The EU Emissions Trading System (EU ETS) ................................................................................ 2 Leakage Effect   ...................................................................................................................... 6 Carbon Tax ............................................................................................................................... 6 3.The UK: EU ETS and Carbon Tax.................................................................................................. 7 4.BREXIT: Beneficial or a storm yet to come? .............................................................................. 10 5.Conclusion .............................................................................................................................. 13 6.References .............................................................................................................................. 14  2 1 Introduction Since studies have discovered what the effect of GHG in the atmosphere have, different strategies have been conceptualized in order to minimize and prevent the damage already made by them, directly affecting our climate. Signs of climate change can be seen in the development of the average temperature on earth. Although an increase of +1 Celsius does not seem to represent such a big issue for most of the people, it is indeed a great problem if we take into consideration how easy it can be to disturb the natural balance that all living creatures have on this planet. A rise in temperatures could lead to major natural catastrophes and to the potential extinction of animal species, crops and life as we know it as well. This issue has gain more popularity throughout the years, mainly because people are now able to see it with their own eyes. There is no way to deny that our planet is facing some major changes. To prevent the struggles of the future, it is necessary to act and make some changes that will enable not only the government but society as a whole to effectively reduce the amount of emission that will continue to be send out into our atmosphere. Scientists and representatives of different countries seek to work together and reach an agreement to collectively face this challenge. Different Summits had taken place in the past and since the Kyoto Protocol in 1997 and the Paris Summit in 2015 stronger actions are taking place. However, politics are still an issue to discuss since many countries want to veil for their own interests and that is how for example big political developments such as BREXIT could put at risk all the efforts being made. The UK is a special case since it has contributed so much to establish the structure of the EU ETS and has cooperated with other nations such as China to keep un with this ambition. The United Kingdom is as well a leading country in terms of carbon pricing. For the UK exiting the European Union raises a lot of uncertainty around the question what the UKs course of action will be after the 29 th  March 2019. This essay will try to analyse what the different climate policies have achieved so far and specifically which options the United Kingdom has now that is facing the withdrawal from the EU. 2.Tools for making Climate Policies The EU Emissions Trading System (EU ETS) The EU ETS, also called the European Union Emissions Trading System is the pillar of the European Union Strategy to cut on greenhouse emissions. With this strategy the biggest emitters have a financial  3 incentive to decrease the GH emissions by setting a cap on the total amount of GH gasses companies can emit each year and requires monitoring of these emissions. This policy is known as Cap-and-Trade Agreement. The EU ETS puts a cap on the total volume of GHG emissions being made from installations and aircraft operators. These sectors are responsible for almost 50% of the total Greenhouse Gas emissions within Europe. According to the European commission this trading system covers more than 11,000 power stations and industrial plants in 31 countries (all 28 EU countries plus Iceland, Liechtenstein and Norway), and flights between airports of participating countries. The cap is reduced over time so that emissions fall. Within the cap, companies receive or buy emission allowances, which they can trade with one another as needed. After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. Source: EU ETS Handbook 2015, Page 16. According to information provided by the European commission in regards to sectors and gases covered by the systems, these are: 1   •   carbon dioxide (CO2) from o   power and heat generation o   energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals o   commercial aviation •   nitrous oxide (N2O) from production of nitric, adipic and glyoxylic acids and glyoxal  4 •   perfluorocarbons (PFCs) from aluminium production Participation in the EU ETS is mandatory for companies in these sectors, but •   in some sectors only, plants above a certain size are included •   certain small installations can be excluded if governments put in place fiscal or other measures that will cut their emissions by an equivalent amount •   in the aviation sector, until 31 December 2023 the EU ETS will apply only to flights between airports located in the European Economic Area (EEA ). Share of free allocation calculated based on benchmarks per sector 2013 2014 2015 2016 2017 2018 2019 2020 Electricity production 0% 0% 0% 0% 0% 0% 0% 0% Industry sectors 80% 72.9% 65.7% 58.6% 51.4% 44.2% 37.1% 30% Industry sectors deemed exposed to carbon leakage 100% 100% 100% 100% 100% 100% 100% 100% Source: EU ETS Handbook 2015, Page 24. In order to meet the emission reduction targets that had been set during the Kyoto Protocol in 1997 it was necessary to create policy instruments that could enable all nations to meet these goals. In 2000 the European commission introduced a draft with some ideas and guidelines in regards to the design of the EU ETS. This system was launched in 2005 and was set as a 4 Phase plan 2 : KEY FEATURES OF PHASE 1-3 AND REVISIONS FOR PHASE 4 Phase 1   Phase 2   Phase 3   Phase 4     Covered only CO2 emissions from power generators and  Lower cap on allowances (some 6.5% lower compared to 2005)  A single, EU-wide cap on emissions applies in place of the previous system of national caps The revision focuses on:  Strengthening  the EU ETS as an 2  EU ETS Handbook 2015 Phase 1 (2005-2007)Phase 2 (2008-2012)Phase 3 (2013-2020)Phase 4 and Beyond (from 2021)
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