Path-dependent climate policy: the history and future of emissions trading in Europe

Abstract:

At the end of the 1990s, the EU was still sceptical towards emissions trading, but in 2003 it adopted a directive that enables such trading in the EU from 2005 onwards. Instead of presenting ad hoc explanations, we develop and apply the path dependence approach to clarify this remarkable attitude change. Sunk costs, switching costs and learning explain why politicians were initially tempted to add credit trading to existing, sub-optimal policy. Permit trading, however, is more efficient and effective. An institutional lock-in was bound to occur, but attitudes changed as a result of internal pressures, such as the pioneering role of the European Commission, and external shocks, such as the withdrawal of the US from the Kyoto Protocol. A full-scale institutional break-out towards efficiency is not guaranteed, though, because elements of credit trading can still enter the permit trading directive. The risk is that these elements become locked in, from which it may be difficult to escape.