New rules, new politics, same actors – explaining policy change in the EU ETS

The allocation rules for phase one EU ETS emissions permits demonstrates that energy generators were lobbying winners because they successfully blocked differential treatment (rules) from energy intensive industries, who cannot pass-on real or nominal costs of permits to consumers. As a result, these generators benefited from windfall profits. In phase three, the reverse is true; energy intensive industries successfully established differential rules. These rules will provide energy intensive industries with free allocations while most generators will be subject to 100 per cent auctioning, thus removing the windfall profit mechanism for generators. Literature applying public choice theory to this case study predicted free permit allocations but not windfall profits for generators nor the change in allocation rules in phase three. This paper presents the argument that a shift in Wilson’s Typology from client to interest group politics best explains these changes and provides a good framework for other jurisdictions considering emissions trading reforms. This dynamism in Wilson’s Typology is demonstrated by comparing the positions of industry associations representing energy generators and energy intensive industries with the two directives before and after consultations, which facilitates the identification of lobbying winners and losers. The EU ETS case study is fertile ground for testing regulatory theories that explain shifts away from clientelist policies with high levels of rent-seeking and towards more optimal policy equilibriums. This paper provides both a theoretical framework and empirical evidence for how emissions trading policy can be improved, despite rent-seeking, once it clears the legislative hurdle.