Rent-seeking and grandfathering: The case of GHG trade in the EU

The EU Commission has recently proposed a new directive establishing a framework for greenhouse gas (GHG) emissions trading within the European Union. The idea is to devalue part of the emission quotas in circulation by the year 2012 at latest, so that the EU will meet its Kyoto target level of an 8% GHG reduction. Our main question is whether the final choice of allocation rule can be explained by the role of industrial groups in the policy making process. We answer this question by using rent-seeking theory and by analysing the Green Paper hearing replies from the main industrial groups. In other words, we want to explain and observe how rent-seeking (or lobbyism) affects the design of environmental regulation and energy policy in favour of well-organized industrial interest groups. We argue that some firms are likely to reap a net gain from being regulated by a grandfathered emission trading system. This is so because total costs of emission reduction and lobbyism are likely to be smaller than the total rents from having this type of regulation.