The Introduction of Emissions Trading Systems as a Socio-Ecological Transformation Process

  • Project no.3214
  • Duration 01/2004 - 04/2006

The development of Emissions Trading Systems (ETS) adds a new market-based instrument to EU environmental policy, which has traditionally been more oriented towards command-and-control instruments. The design of this instrument at the national level entails new chances as well as risks.

There is still a large information gap concerning the ecological, economic, institutional and social implications of ETS. Consequently, there is a strong need for further research on the design of current systems but also on designs for the period 2008-2012 and the second commitment period of the Kyoto-Protocol (from 2012) onward.

The aim of the JET-SET (Joint Emission Trading as a Socio-Ecological Transformation) project is to conduct an integrated analysis and assessment of ETS implications in order to fill this information gap. The project is coordinated by the Wuppertal Institute and designed as a multi-disciplinary research process.

The aims of the project are:

  • An integrated assessment of the economic, ecological and social implications of the EU Emissions Trading System
  • The formulation of concrete policy recommendations with respect to the design of future trading schemes
  • The conceptual and theoretical embedding of the research results into the inter-disciplinary sustainability research

During the first phase of the project, the project partners conducted four so-called "Base Projects" ("Institutions", "Market Power and Risk", "Social Perceptions and Discourse", "Land-use and Energy Crops"). At the end of the first phase, an integrated research concept has been developed that serves as the basis for the second project phase.

The second project phase addresses the potentials and risks related with linking the EU Emissions Trading System with other emerging domestic schemes. Four so called "Cross-Section Projects" address the following aspects:

  • Policy Scenarios
  • Economic and environmental effects
  • Impacts of linking emissions trading systems on equal distribution of per capita emissions
  • Implications of design differences.

Finally, a number of related Supplemental Projects deal either with the development of the research concept in phase one, gender implications of emission trading systems, the elaboration of strategies at the municipal and federal state level or the evaluation of the research and learning process within the overall project.


Base Project 1 "Institutions"

In charge of the project: Christiane Beuermann (WI)

WI staff working on the project: Tilman Santarius, Wolfgang Sterk, Christiane Beuermann, Hermann E. Ott, Ralf Schüle, Marcel Braun

Partners: Marcus Stronzik, Marion Hitzeroth, Janina Onigkeit

The base project "Emission Trading Systems and Institutional Development" examines the modifications of institutions within society and politics brought about by the progress of the EU Emissions Trading Scheme. These modifications will be considered from a political science viewpoint based on a multilevel approach.

The base project pursues two goals:

  • Analysis of the agenda-setting process, of the (political) restrictions during the policy formulation phase and of the implementation process, covering the discussions at all political levels, especially at the international and the EU level
  • Creating theoretical knowledge about the development and enforcement of measures in a multilevel governance system as well as strategic recommendations


Base Project 2 "Risk and Market Power"

In charge of the project: Marcus Stronzik (ZEW)

ZEW staff working on the project: Marcus Stronzik, Marion Hitzeroth

Partners: Tilman Santarius, Ralf Schüle (WI), Janina Onigkeit (CESR)

The base project "Risk and Market Power" is working on the performance of permit trading systems in the real world. In theory, emission trading systems are perceived as being a cost-efficient instrument for achieving a given emission target. But these considerations are based on idealised assumptions such as full information and full competitiveness. The main objective of this base project therefore is to scrutinise these assumptions. One sub-project will be focused on the behaviour of market participants under uncertainty. Apart from discussions with project partners on the nature of risk in emission trading systems, methods of financial economics are applied to study this problem. In the second sub-project, the assumption of full competitiveness is questioned and the conditions under which market power could arise on the permit market are examined by means of data analysis.


Base Project 3 "Social Discourse and Perceptions"

In charge of the project: Ralf Schüle (WI)

WI staff working on the project: Tilman Santarius, Wolfgang Sterk

Partners: Marcus Stronzik, Marion Hitzeroth (ZEW), Janina Onigkeit (CESR), Irmgard Schultz, Immanuel Stiess (ISOE), Markus Duscha (ifeu)

The base project "Social Discourse and Perception" studies the public debate about the national allocation plan in Germany in order to understand the underlying processes and activities which led to the final design of an emissions trading system in Germany. The central aim of the project is to detect whether it is possible to draw conclusions and policy recommendations from this debate for future negotiations about emissions trading schemes. The analysis considers the institutional and procedural levels as well as the public discourse.

There are two supplemental projects that are also dealing with questions concerning public discourse:

  • Gender Aspects of Emissions Trading Systems (ISOE: Dr. Irmgard Schultz, Dr. Immanuel Stiess)
  • The Role of Local Authorities and the German Länder in the European Emissions Trading System. (ifeu: Markus Duscha, Hans Hertle)


Base Project 4 "Land-Use and Energy Crops"

In charge of the project: Janina Onigkeit (CESR)

Partners: Marcus Stronzik (ZEW), Christiane Beuermann, Tilman Santarius, Ralf Schüle (WI), Marion Hitzeroth (ZEW)

Base project 4 "Land-Use and Energy Crops" deals with the integration of agriculture and forestry into the climate protection regime. Depending on the design of national and international emissions trading systems, these two sectors may contribute to the German climate policy targets.

The inclusion of agriculture and forestry provides new economic possibilities, for example the growing of biomass for energy production as mentioned in the German Sustainability Report.

In order to estimate the potentials but also the risks of an expanded growing of energy plants for energy production, a land-use-change model for Germany will be developed. By coupling land-use change scenarios which are driven by socio-economic factors with models quantifiying biogeochemical processes, new insights into the implications of an extended use of energy plants as energy carriers will be derived.


Cross-Section Projects

Many countries and regions have started to integrate emissions trading into their spectrum of national climate policy instruments. The emergence of numerous national and sub-national emission trading schemes raises the issue of linking them. What economic and environmental effects can be expected? What are crucial institutional and political preconditions for linking? In terms of economic efficiency and global equity, will the effects of connected domestic markets at the entity level be similar to the ones that have been analysed for trading at the government level? What will be the contribution of linking processes to achieving more ambitious targets for reducing greenhouse gas emissions? The project addresses these questions by integratively assessing different alternative policy scenarios of linking domestic emission trading systems (ETS) in four sub-projects.

Policy Scenarios (CSP 1)

The technique chosen for the assessment of the effects of linking national and sub-national emissions trading schemes is the scenario technique. Given the large differences in designing and implementing domestic schemes, a number of alternative policy scenarios of linking processes will be defined and then be assessed in economic, environmental and institutional terms. These policy scenarios are specified by so-called storylines, which define the basic variables of the scenarios. The basic variables here are,

  • the participating countries,
  • the institutional status with regard to the climate regime and
  • the time-horizon by when domestic schemes will be developed and will (probably) be linked to an emerging multi-national emissions trading scheme.

In all scenarios, the CDM countries Brazil, Mexico, India China and South Korea are included.

Impacts of Linking ETS on Equal Distribution of Per Capita Emissions (CSP 2)

To "prevent dangerous anthropogenic interference with the climate system" as required by Article 2 of the Climate Convention, more ambitious emission reduction targets are necessary than those agreed under the Kyoto Protocol. To increase acceptability of those targets, fairness principles such as convergence of per capita emissions entitlements will play an important role. Linking the EU ETS to other national trading systems and to the project-based mechanisms of the Kyoto Protocol, CDM and JI, will affect per capita emissions in the EU. The questions to be investigated in this sub-project are, first, which level of per capita emission entitlements in industrialised and developing countries result from a 550 ppm CO2 equiv. stabilisation scenario, and second, what implications have different linking scenarios and design elements of the ETS on per capita emissions levels in Europe.

Economic and Environmental Effects (CSP 3)

This sub-project quantitatively assesses the economic impacts and reduction efforts of alternative linking scenarios including use of the CDM. Analyses are performed using a numerical multi-country equilibrium model of the world carbon market based on marginal abatement cost functions. For a realistic reproduction of the European ETS, the model explicitly divides the various national economies into energy-intensive (trading) and remaining (non-trading) sectors. As a result, distributional effects between ETS participants, CDM host and donor countries as well as between sectors of the economies are analysed.Impacts of linking ETS on equal distribution of emissions.

Implications of Design Differences (CSP 4)

This sub-project surveys the current status of the currently evolving domestic emission trading systems and analyses their designs. It emerges that the schemes differ significantly in key design aspects, which gives rise to the question in how far linking might impair rather than enhance the ecological integrity and economic efficiency of trading. The project outlines what adjustments might be made to allow for linking and what the cost-benefit ratio would be.


The anticipated effects of linking domestic ETS are:

  • In economic terms, generally the linking of domestic schemes should reduce the over-all reduction costs. However, the level of cost reduction crucially depends on the cost structures and technological pre-conditions of participating countries/regions as well as on the specific design of the market (i.e. on the allowance allocation mode).
  • In institutional terms, differences in ETS design do matter. Key differences in design require adjustments to be made and in some cases the drawbacks may outweigh the benefits. Additionally, from the perspective of the future development of an international climate regime, the bottom-up approach of linking domestic schemes serves to bolster the Kyoto regime, especially with a view to its extension beyond its first commitment period.

In terms of global equity, linking the EU ETS with other ETS and JI/CDM might prevent a fundamental restructuring of the global energy system in industrialised countries as per capita emissions need to decrease only very slowly.


Supplemental Project 1 "Concept Development"

The supplemental project "Concept Development" had a key role in integrating the individual projects during the first project phase until December 2004. The project team developed a common trans-disciplinary research approach for the second project phase (cross-section projects).

Consequently, the aims of supplemental project 1 were:

  • To develop a trans-disciplinary research concept for the second project phase
  • To develop the ability of internal reflexion
  • To prepare the second project phase


Supplemental Project 2 "Gender-Aspects of Climate Protection and Emissions Trading Systems"

Up to date, not much research has been done about gender issues in the field of climate protection in general nor in the field of ETS in particular. Possible research questions are the implications of ETS on men and women and on gender relations or whether men and women have different views on ETS.

The aim of the module carried out by the Institute for Socio-Ecological Research (ISOE) is to identify potential impacts of ETS on gender relations and to integrate a gender perspective into the overall research activities of the project. For this purpose the findings of ISOE's investigation on gender impacts of climate protection have been presented on a workshop attended by all the joint project partners. The other partners have then applied the results of ISOE's work, as far as possible, in formulating research questions concerning gender issues for their own sub-projects.


Supplemental Project 3 "Economic Implications"

As proposed by the funding agency, another supplemental module has been added to the project. This module analyses the impacts of ETS on innovation, employment and distributional effects. The aim of this module is to survey the relevant literature and to integrate the findings into the overall project.


Supplemental Project 4 "Strategies on Emissions Trading at the Local and Federal Level and Embedding ETS in New Climate Policy Instruments at the National Level"

EU emissions trading is implemented at the national level, but it is also of interest to examine how local authorities and the German Länder prepare for emissions trading and how they can contribute to the implementation of this instrument.

This module also analyses whether and how the instrument of emissions trading can contribute to increasing energy efficiency. In the context of market-based instruments of climate protection "green certificates" for renewable energy have already been discussed. Furthermore, France would like to introduce "white certificates" in order to increase energy efficiency of energy applications.


Project partners within the research project

Wuppertal Institute:

  • Dr. Ralf Schüle (Co-ordination)
  • Dr. Hermann E. Ott
  • Christiane Beuermann
  • Wolfgang Sterk
  • Marcel Braun
  • Renate Duckat

Centre for Environmental Systems Research:

  • Prof. Dr. Joseph Alcamo
  • Dr. Janina Onigkeit

Centre for European Economic Research:

  • Niels Anger
  • Prof. Dr. Christoph Böhringer
  • Dr. Andreas Löschel
  • Dr. Ulf Moslener

Institute for Socio-Ecological Research:

  • Dr. Irmgard Schultz
  • Immanuel Stiess

Institute for Energy and Environmental Research:

  • Markus Duscha
  • Hans Hertle

Scientific Advisory Board:

  • Prof. Dr. Hartmut Grassl, Max Planck Institute for Meteorology
  • Dr. Jaques Leonardi, Max Planck Institute for Meteorology
  • Dr. Josef Janssen, etsg AG
  • Dr. Axel Michaelowa, Hamburg Institute for International Economics (HWWA) - International Climate Policy
  • Prof. Dr. Ortwin Renn, Akademie für Technikfolgenabschätzung in Baden-Württemberg
  • Dr. Franzjosef Schafhausen, German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety - AG Z III 6
  • Dr. Bodo Linscheid, German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety - AG Z III 6
  • Dr. Erich Wallenwein, German Federal Ministry of Economics and Labour, Head of Division IV C 2

The following project members coordinate two additional working groups in the field of socio-ecological research:

  • Dr. Irmgard Schultz (ISOE) coordinates the working group "Gender".
  • Dr. Ralf Schüle (WI) coordinates the working group "Integration with professional practice".


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