Exploring Uncertainties in the EU ETS: "Learning by Doing" Continues Beyond 2012.

The amendment of the EU ETS agreed on in December 2008 will see covered entities face new challenges. Due to a more stringent overall reduction target, the emissions trading regime will have a larger influence on the business sector. The basic question "who can get, under what conditions, tradable allowances" will thus be even more relevant than in the initial regime. This paper sheds light on possible uncertainties that industries might face following the new allocation provisions. Both regulatory uncertainty and "business uncertainty" regarding the price to be paid for allowances serve as starting points. By nature, business uncertainty is much more prevalent in the event of auctioning compared to free allocation, which seems to encompass larger regulatory uncertainty, especially for the possible exposed sectors. Moreover, the article highlights the difficulty of designing allocation mechanisms, and some of the complexities that might arise in the course of a trading period. Of particular note is that it cannot be excluded that the executive regulations for auctioning and free allocation need to be amended in order to ensure the intended outcome of the scheme. In this sense, the learning by doing period has not ended at all. The article concludes that, from a governance perspective, any legislator should incorporate the question of regulatory and business uncertainty when introducing emissions trading schemes or major amendments to such schemes. In fact, environmental effectiveness could have also been achieved with the current emissions trading scheme of the Commission had conducted a sufficiently strict inspection of the national allocation plans. For protecting the climate and for ensuring an emission reduction of 20 percent in 2020, the fundamental review was not, in fact, a strict necessity. The trade-off of developing a suitable framework for a level playing field and avoiding windfalls in the context of emissions trading is that industries need to face new regulatory approaches, for which it is not yet completely clear how they will affect their business activities. [ABSTRACT FROM AUTHOR]