ZEW Study: Management of EU Emissions Trading Scheme Causes High Costs

Approximately 800 companies in Germany participate in the EU emissions trading scheme (EU ETS). They spend more than 8.7 million euros per year for the management and administration of EU ETS, which equals an average financial burden of 10,000 euros per company and year. Costs are especially high for small firms which emit less than 25,000 tons of CO2 per year. Compared with larger emitters, their costs per ton of CO2 are ten times higher. To eliminate this inequality, small emitters could be excluded from the EU ETS and could be given other incentives to reduce their CO2 emissions. This is the result of a recent study by the Centre for European Economic Research (ZEW) in Mannheim, Germany.

Compared with larger emitters, small emitters pay up to ten times more for administrative costs per ton of CO2. For firms with less than 25,000 tons of emissions per year, which applies to about 50 per cent of all firms regulated within the scope of EU ETS, transaction costs per ton of CO2 amount to 0.33 up to 1.48 euros. Average transaction costs decrease significantly when emissions increase. Firms emitting more than 100,000 tons of CO2, which is the case with about a quarter of all regulated firms,thus have average transaction costs of less than 0.10 euros per ton of CO2. "This result makes clear that there are considerable advantages for large emitters in the emissions management. Larger emitters can handle the instrument much more efficiently than small ones", says Peter Heindl, environmental economist at ZEW.

A regime that follows the Australian model could be introduced to eliminate the unequal cost burden. In Australia, small emitters do not have to participate in the recently introduced emissions trading scheme. Instead, when purchasing fossil resources they pay a carbon duty which has been factored into the price. "This arrangement produces economic incentives to reduce CO2 emissions, while at the same time the administrative costs are kept at a low level", explains Heindl.

The major part of the administrative costs of EU ETS is generated by calculating and verifying the annual amount of emissions (69 per cent). Significantly smaller parts are related to the trade of emission permits (20 per cent) and the general provision of information (11 per cent).

Besides the problem of unequal cost burdens for individual companies, which results from the administration of emission trade, there is another highly important effect for the overall economy. Since the amount of transaction costs depends on the quantity of emissions of the respective firms, the incentives for reducing CO2 emissions differ. "In practice, small emitters have greater incentives to reduce CO2 emissions than large emitters. While this undesired effect has no influence on the ecological efficiency of the emission trading scheme,  it does reduce its economic efficiency, since it produces less incentives for larger emitters than for the smaller ones", says Heindl.

Data from 150 enterprises in Germany which are regulated within the scope of the EU emission trading scheme have been evaluated for this ZEW study. Since 2005, greenhouse gas emissions of industrial companies and energy producers have been regulated within the EU emissions trading scheme the aim of which is to reduce greenhouse gas emissions in the EU by 21 per cent until 2020 compared with 2005.

For further information please contact

Peter Heindl, Phone +49 621/1235-206, E-mail heindl@zew.de