the EU package therefore “only” arise from the actual policy implementation which makes emission reduction much more costly than needed. Cost-effectiveness postulates that the marginal cost (price) to each use of greenhouse gas emissions should be equalized, thereby assuring that the cheapest abatement options are realized. This could be achieved through a comprehensive EU-wide cap-and-trade system where emission markets work out the leastcost solution by establishing a uniform emission price. To achieve a single policy target only one policy instrument is required – an insight which has been established in more general terms through the seminal work of Tinbergen (1952) calling for the equalization of the number of instruments with the number of policy targets.3 EU climate policy practice, however, violates basic principles of cost-effectiveness. Firstly, the EU Climate and Energy Package which is the central piece of legislation to achieve the overall EU emission reduction target does not accommodate comprehensive EU-wide emissions trading. The EU foresees explicit emissions trading only between energy-intensive installations (sectors) under the EU Emissions Trading Scheme (EU ETS), which covers just around 40% of EU greenhouse gas emissions. Each EU Member State must therefore specify additional domestic abatement policies for the sectors outside the EU ETS in order to comply with the overall EU emission reduction objective through mandated country-specific targets for the non-ETS segments of its domestic economy. Since there are no tight links between the ETS emission market on the one hand and the non-ETS emission “markets” on the other hand, marginal abatement costs across these segments will typically not be equalized and substantial excess costs of market segmentation are likely to occur (Böhringer et al. 2005). Secondly – and not at least because of the fragmentation into one ETS market and twenty-seven domestic policy regimes for the non-ETS sectors – the EU employs a broader policy mix instead of one single instrument to meet its climate policy target. Beyond emissions trading the EU builds upon the explicit promotion of renewable energy production and energy efficiency both in ETS as well as non-ETS segments of the economy.4 Efficiency and renewable targets have triggered a wide variety of policy measures across the 27 EU Member States including implicit or explicit subsidies to renewables, efficiency standards for buildings, and specific product policies such as banning incandescent light bulbs or patio heaters. From the sole perspective of climate policy the myriad of instruments used in the EU to curb greenhouse gas emissions is doomed to generate excess costs due to overlapping counterproductive regulation. If targets for renewable energy and energy efficiency become binding, they give an outcome different from the cost-effective solution generated by comprehensive emissions trading and thereby create additional costs (Böhringer et al. 2010). Regarding the energy security objective of the EU package a rigorous economic assessment is tricky. In first place it is unclear of what “energy security” is supposed to be. Colloquially, energy security is often portrayed as reduced dependence on imported energy, most notably 3 4
While more targets than instruments make targets incompatible, more instruments than targets make instruments alternative, i.e., one instrument may be used instead of another or a combination of others. The EU Climate and Energy Package includes a 20% target share of renewable energy sources in gross final energy consumption and a mandated increase of energy efficiency of 20% by 2020 along with the 20% greenhouse gas emission reduction target.
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