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Ifo Project

Emissions Trading with Greenhouse Gases in the European Union

Client: Bavarian State Ministry (Bayer. Staatsministerium für Landesentwicklung und Umweltfragen) •
Project period: March - June 2002 •
Department: Environment, Regions and Transportation


Project team:   Dr. Johann Wackerbauer
Client:   Bavarian State Ministry (Bayer. Staatsministerium für Landesentwicklung und Umweltfragen)
Project period:   March - June 2002


In the 1997 Kyoto Protocol 38 developed countries (plus the EU) have accepted legally binding greenhouse gas emissions reductions of at least 5% in the period between 1990 to 2008-12. The European Union has committed itself to an even higher reduction of 8% within this time framework. To provide flexibility to countries, the Kyoto Protocol permits the transfer or exchange of emissions reductions between the signatory countries via so-called flexible mechanisms. Industrialised countries may transfer or acquire from each other emission reductions on a project basis through Joint Implementation (JI). The Clean Development Mechanism (CDM) is a mechanism for emissions credits to be obtained from projects undertaken in developing countries. Finally, the Kyoto Protocol marks the beginning of the creation of an international emissions trading (IET) system between the signatory states.

In October 2001, the European Commission submitted a proposal for a directive of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community. In the proposal a greenhouse gases emissions trading system for the European Union at industry level is proposed in contrast to the Kyoto Protocol, which allows international emissions trading only at the state level.

Theoretical considerations suggest that emissions trading has considerable economic advantage over the use of other instruments to combat greenhouse gas emissions and meet the Kyoto target. Evidence also suggests that the more widely emissions trading is applied, the higher the economic benefits are. This contrasts with the actual situation that environmental policy rests on “traditional” instruments, i.e. regulation, voluntary agreements, taxation. For that reason, the compatibility of an EU-wide industry level emissions trading system with the existing instruments and the Kyoto mechanisms is investigated in this study.


In some countries (Denmark, UK, France, Netherlands, Norway) and within companies (BP Amoco, Shell, German electricity utility HEW) emissions trading schemes are planned or already implemented. The experience gained with those schemes shows that the combination of emissions trading, environmental taxation, command-and-control instruments and voluntary agreements is feasible. Based on that approach, the Commission’s proposal was evaluated and ways to optimise it with respect to the combination with existing environmental regulations were demonstrated.


In the outcome, an alternative model for an EU-wide greenhouse gases emissions trading system was developed. Similar to the British Emissions Trading System there should be two routes of emissions trading: a so-called “absolute” sector with absolute targets or caps (“direct route”) and a “unit” sector (“agreement route”) with agreements on efficiency targets. Firms can enter one of these routes on a voluntary basis. The commitment of German industry on the reduction of greenhouse gases is used as a baseline for emissions trading with specific emissions (per ton of output) in the “unit“ sector. Firms or individuals that are not subject to a voluntary agreement can take part in emissions trading with absolute emissions via the “direct route“. In this case, regulations on greenhouse gas emissions are applied as a baseline. To provide an incentive to join the emissions trading system, the firms receive an eco-tax reduction. Project-based certified emission reduction units that firms have gained abroad in connection with Joint Implementation or the Clean Development Mechanism can be traded within the European Emissions Trading System.

Publications on the project

  1. Wackerbauer, Johann, Emissionshandel mit Treibhausgasen in der Europäischen Union : Studie im Auftrag des Bayerischen Staatsministeriums für Landesentwicklung und Umweltfragen, ifo Forschungsberichte 16, ifo Institut für Wirtschaftsforschung, 2003 | Details | PDF Download

  1. Wackerbauer, Johann, "Emissionshandel mit Treibhausgasen in der Europäischen Union", ifo Schnelldienst 56 (08), 2003, 22-30 | Details | PDF Download

  1. Ellerman, A. Denny, Nick Johnstone, Friedrich Schneider, Alexander F. Wagner, Juan-Pablo Montero and Johann Wackerbauer, "Tradable Permits", CESifo Forum 4 (1), 2003, 3 - 32 | Details | PDF Download

Environment, Regions and Transportation (URV)

The department for Environment, Regions and Transportation (URV) was divided into two research departments in 2008, one of them Environment and Transportation (UV), which was renamed to Energy, Environment and Exhaustible Resources (EUR) in September 2010.


Dr. Johann Wackerbauer

Ifo Institute
Ifo Center for Energy, Climate and Exhaustible Resources
Phone: +49(0)89/9224-1277
Fax: +49(0)89/907795-1277
Email: wackerbauer @

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