The EU Legal Frameworks - The Sustainability of Renewable Energy in Europe - page 8

The first problem is related to the European mechanism of allocation used so far.
Emission allowances are allocated free of charge, and the allocation could be made
on the basis of past emissions (called grandfathering). This mechanism can create a
vicious circle because it does not stimulate the adoption of new technologies with
low environmental impact. Furthermore, it favors large companies that in the first
phase of allocation received a large number of permissions to maintain their level
of activity at the expense of small companies (Borghesi 2010 ).
Another problem is related to inconsistencies between emission permits and
national allocation plans (NAP): governments have created too many emissions
permits to protect the welfare of domestic firms who wish to receive the highest
number of permits.
Finally, the large and persistent fluctuations in market prices have caused havoc
in the market and uncertainty about the quality of environmental policy.
The main elements of the new system of EU ETS are:
• New emissions cap set at 20 % less than 2005 levels by 2020.
• The use of credits from the clean development mechanism (CDM) and joint
implementation (JI) is limited to 50 % compared to the overall reduction in emis-
sions of the EU in the period 2008-2020.
• The inclusion of new sectors such as aviation and the aluminum industry.
• Firms operating in the electricity sector are obliged to buy 88 % of the allow-
ances to each plant through an auction mechanism; 10 % of the permits is redis-
tributed from countries with higher per capita income to low per capita income
countries and the remaining 2 % is given to the member states that have failed
to achieve the target of 20 % GHG reduction in 2005 (i.e., the Eastern European
countries).
The sectors covered by the EU ETS are thermal power plants, industries in the field
of energy production and manufacturing production (energy activities, production
and processing of metals, cement, ceramics and tiles, glass, paper), and aircraft
operators. From 2013, the sectors have been further extended to the production of
aluminum, lime, nitric acid, hydrogen carbonate, and sodium bicarbonate and facili-
ties that deal with the capture, transport, and storage of CO 2 .
The adoption of the auction mechanism in the ETS means a better distributional
effect compared to grandfathering, since the revenue generated from the auction can
be used either to reduce distortionary taxes or to promote research and development
in clean technologies (Carraro et al. 2006 ).
The most important point concerns the directive on RES to achieve the goal
of 20 % on energy consumption by 2020 and to share the burden among member
states. The RES Directive has innovated the Kyoto Protocol which left to the discre-
tion of the countries the choice of methods to achieve the nonbinding objectives,
while the directive sets the target of 20 % by 2020 divided into subnational binding
targets for member states (Fig. 1.2 ). In particular, 50 % of this effort must be shared
equally among the member states, while the remaining 50 % is modulated accord-
ing to gross domestic product (GDP) per capita. The objectives are then modified to