CO2 emissions in the EU are currently managed by the ETS (Emission Trading Scheme); this is a “cap and trade” system, where polluters must purchase or trade certificates prior to operate. Certificates are issued based on emission limits for each sector. Weaknesses of such system are
(a) the high number of exceptions granted to several sectors and small/medium companies: only 55% of CO2 emissions are covered by the system;
(b) it does not cover goods produced outside the EU and imported into the EU;
(c) resources gathered from such mechanism are not going back to the economy and are not used for environmental policies. In order to reach the target of being carbon neutral by 2050 we must set more ambitious targets and re-think the ETS system.
Since a quantitative control mechanism cannot work unless all emissions are captured, our ECI proposes a market mechanism, by introducing a minimum price on CO2 emission and abolishing the free allowance system.
Furthermore, we propose a border adjustment mechanism, in order to avoid delocalization and to maintain the same level of competitiveness within the EU. A non-EU producer that wants to import goods into the EU, must be subjected to the same minimum carbon price.
Such market mechanism will incentivize producers to a shift towards renewable energy, and will provoke effects not only in the EU but also outside, since non-EU producers that want to import goods into the EU would be incentivized to use renewable sources as well.
Several studies have shown that such model would be compatible with WTO rules. One of the most interesting is the paper by Professor Alberto Majocchi (University of Pavia): “Carbon Pricing and border tax adjustments: the compatibility with WTO Rules”.