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Renewable Energy Support Mechanisms and Environmental Policy in the EU

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During the last few years, environmental policies at the global, national and local levels have undergone profound changes. There are many reasons for this. Firstly, there is a shift of concern from local pollution problems towards global long-term issues like climate change, depletion of freshwater reserves, etc. At the same time, environmental protection is being seen not only as an obligation but also as an opportunity. The European Union (EU) is trying to deal with the continuous challenges by introducing an innovative approach to environmental policy. This is achieved with the integration of environmental consideration into other policies and the variety of environmental instruments, in order to improve both the effectiveness and efficiency of environmental management. However, the biggest challenge has been to increase the competitiveness of European industry while protecting the environment. Environmental policies can only be effective if there is a proper collaboration between the regulators and the regulated. For this interaction to be successful, it is vital to create the right environmental regulatory framework.

Traditionally, the economic analysis of an environmental policy focuses on its effects. The whole process involves monitoring of the environmental regulations and how they affect technological changes, competition among companies, employment and economic growth. Most of the results lead to the implementation of instruments such as taxes and tradable permits. Environmental policies include various stages. At first, there is a phase of dialogue and negotiations between public authorities, regulators and the interested parties. In this context, the Commission emphasizes on the collaboration and right interaction among the various actors (government, companies, consumers). In addition, EU member states promote the use of stakeholder consultation and intervention in the development of new environmental instruments. Also, a good relationship among all interested parties is substantial for the proper implementation of the policies. Another factor that should be taken into consideration is that institutions and regulatory methods are constantly changing.

The Act of Political Union signed in 1992 has been the first step towards an improved environmental law-making in the EU. Majority among member states is introduced for the decision making, instead of unanimity and the role of the European Parliament (EP) is strengthened. During the years, it is observed that the EU imitates the other OECD countries when it comes to new policy instruments. Moreover, environmental taxation is being adopted by many member states as well as the use of voluntary agreements between companies and governments. Companies play a significant role in the regulatory process. Of course this is the result of endorsement and encouragement from various policy makers. Most of the information regarding the amount of pollution, abatements costs and technology is only known by companies. Consequently, the regulators have to collect the data before trying to reduce pollution. Also, it is often observed that firms undertake lobbying activities before any proposals are drafted by the government. It should be noted that sometimes regulations are subject to failure. Environmental economics is very marked with Pigou’s concept of externality, which is linked directly to market failure. This induces many environmental economists to seek public intervention. Even regulators can fail – willingly or unwillingly. This can be caused by lack of information, personal interests or false predictions. However, public intervention to fix the externalities is only meaningful when market failures exceed regulatory failures. Finally, the commonly considered market structure is the model of perfect competition.

The introduction of new environmental regulations should not create disparities in competition among companies. The 2030 legal framework for energy and climate sets new policy objectives and EU-wide targets for reaching to a more efficient and competitive energy system. Also, it paves the way for Europe’s goal of a low carbon economy. Together with the targets for greenhouse gas emissions reduction and energy savings increase, another aim of this policy framework is to achieve a minimum 27% of renewable energy in Europe’s final energy consumption. With the Renewable Energy Directive (RED) already into force (and its target for 2020), EU member states are now focusing towards the next decade and its objectives. In this context, support mechanism for renewable energy sources (RES) are a key factor for the fulfillment of national and European renewables objectives.

In order to prevent any mischiefs that may derive from public support granted to RES, the Commission has decreed specific Guidelines concerning state aid for environmental protection and energy. Due to this predicament, member states are now obliged to adopt their national schemes, stirring up a high level of interest when it comes to the various implementation approaches and the overall costs for RES deployment in the EU. RES policies can influence consumers in many ways. The final cost of achieving the defined goals, will most likely burden the end-users, whether it has the form of electricity bills or higher electricity prices. So, it is essential for the consumers that RES are properly and efficiently exploited.

When the EU was created, a group of like-minded states tried to address their common problems more effectively by working together following two world wars. However, when some of them realized the benefits of this collaboration, they became hesitant about surrendering their sovereignty to a multinational entity. As a result, the EU is considered to be a combination of intergoverntalism and supranationalism. In certain policy areas, EU operates as a pseudo-federal state using its Treaties, when in others, the different governments make the decisions through bargaining. Many have compared the EU as an ‘upside down confederacy’, in which the various members hold powers concerning the higher level bodies (for example, defence), while the EU deals with the lesser activities (for example, environmental policy). In addition, the EU’s authority is usually higher when it comes to adopting and setting the stages of a policy cycle, while the states are held back when it comes to their financial resources. Compared to states, the EU has a relatively small budget of its own, having no general powers of taxation.

This leads to certain assumptions. Firstly, the EU has only a few resources of its own and practically none in the environmental sector. That means that, to get something done, it has to rely to a considerable degree on various regulations. Its ability to use new environmental policy instruments (NEPIs) to achieve environmental goals is extremely diluted. Second, the fact that the states dominate the implementation of EU regulation, makes the EU itself to try very hard to put into effect those policies that were adopted. Thirdly, even within a sector with paramount importance such as the environment, the vertical allocation of tasks can sometimes be irrational. Given the fact that the motive for the development of EU environmental policies is to tackle pollution issues that concern the states, one might expect that most member states would deal with sub-national public goods and the EU would focus on cross-border public goods. However, some believe that the EU concentrates in imposing regulations concerning sub-national public goods like urban air quality and bathing water, while at the same time ignores its responsibility to regulate cross-border issues like energy policy. One of the main reasons for this situation is the open structure of the EU policy process, which makes it possible for different actors to introduce ideas from different directions. The Treaties are the nearest to an EU constitution.

The EU has been effectively engaged in a continual constitutional debate about its authorities, due to the fact that these Treaties have been improved through time. The Treaties offer a variety of principles and procedures which result in environmental policy development. Consecutive Treaty amendments have affected greatly the power of various environmental policy actors. The EU environmental policy was already over 25 years old when the subject of the environment was first mentioned in the Treaties. In fact, the closest things that the EU has to a draft for environmental policy are the Environmental Action Programmes (EAPs). However, any limitations that derive from the Treaties influence directly the selection of environmental policy instruments. The fact that the four main EU institutions are implicated in the policy-making process, is another proof of the importance of the involvement of the Treaties. As expected, this creates a certain level of complexity: the Council of Ministers and the Commission share some executive powers and various implementation functions with the member states. Comparatively, the Council shares certain traditional functions of legislation as well as liabilities with the elected European Parliament (EP) and other national parliaments.

The Commission, with its many Directorate Generals (DGs), exercises environmental policy and acts as the ‘guardian of the Treaties’, making sure that member states will comply with the obligations made in the Treaties. The Commission’s proposals can only be accepted if they are approved by the council of Ministers and the EP respectively. Finally, another major institution of the EU is the European Court of Justice (ECJ). Its role has become to decide the scope of the various environmental laws of the EU and how they have to be implemented by member states. Normally, the European Council doesn’t get involved in the law-making process although it represents the EU’s goals and strategies. Within the Commission, all the DGs (including the Environment) should cooperate in order to take proper decisions on environmental policy because the College of Commissions decides by common consent on Commission proposals.

The European policy model contains the terms of regularized access, bargaining and consensus. Lately there have been many definitional problems concerning the application of the ‘policy style’ concept of the EU. Over the years, many authors developed theories in order to compare the different operating procedures of the member states for making and implementing policies, leaving out the various sectors. The authors also concluded that if they want to examine the ‘policy style’, they would have to rule out the cross-sectoral variation and deal with the differences of each nation instead. On the other hand, many debate that the operating procedures of the EU are not part of its own policy style but merely a mix of national policy styles. Another important fact is that the environment (whose policy we are going to explain) is involved in many other sectors (such as transport and energy) and it is in these sectors that environmental damage is usually met.

By examining thoroughly the EU’s environmental policy, many considerable points emerge. As far as the consensual-impositional part is concerned, the EU is often portrayed as a federation with diversity and a strong desire to achieve consensus. The EU’s wide range of actors (namely the Commission, EP, ECJ, etc) may sometimes object and produce a ‘veto point’. In order to overcome these obstacles and getting the policies adopted, unanimity is required. This means that certain ‘veto actors’ have to compromise and as a result reveal their true motives. It is difficult to adopt EU policy by imposition-or at least consistent imposition. Nevertheless, imposition is sometimes the only way for actors to achieve their objectives. When it comes to reaction and anticipation of environmental problems, the EU (especially the EP and the Commission) has been a strong defender. Even in the first EAP in 1973 where they were integrated. Nowadays, the EU has a Treaty-based commitment to anticipate problems related to the environment, through certain precautionary standards. The most recent example is the EU’s attitude towards climate change.

Through the years, DG Environment has been trying to find a way for a contextual policy to be adopted. This would include concepts like ecological modernization and sustainable development. As a result, the various Treaties now contain a lot of policy principles like precaution, anticipation and environmental policy integration. In 2001, the EU adopted a Sustainable Development Strategy. Before that, only a small number of laws concerned environmental and/or health issues. The first pieces of environmental regulation appeared at the early 70’s. These were mainly focused on radiation from the nuclear sector and the labeling of dangerous substances. The structure of EU legislation should be referred if the command-and-control regulations are to be established. More specifically, primary legislation consists of the Treaties and secondary legislation consists of Regulations, Directives and Decisions which are adopted by the EU to apply the provisions of the Treaties. The Directives have been a commonly used means of the EU’s environmental policy since the 70’s.

They define the legally binding goals and commitments but the final choice of their implementation rests upon the member states. During the 80’s, there has been a dispute over the efficacy and the economic efficiency of the EU environmental regulation. The various members of the industry introduced modern tools like voluntary agreements and eco-taxes in order to find cheaper forms of control. In the next decade, this argument started becoming part of a greater debate-the one concerning the level of authority of member states and the EU. This situation made way for the industry to claim new policy instruments. At the same time, certain member states pushed for the complete review and revaluation of past EU environmental laws but none of them was revised whatsoever. A Commission’s 2001 Paper introduced a more efficient theory concerning new policy instruments. It acknowledged that EU legislation is sometimes too elaborated, thus consuming time to be reviewed and improved and also that it is seldom fully implemented due to the complexity of the negotiation processes.

The Commission committed to make better the quality, effectiveness and simplicity of regulatory acts. This regarded: i) the use of regulation as a last resort, ii) the increase of framework directives which include only the fundamental parts of a policy, excluding any technical details, iii) the introduction of co-regulation which concerned the link of regulation with other tools like the voluntary agreements; and iv) the extensive use of the open method of co-ordination (OMC), by which member states exchange information about the better management and evaluation of their activities. Of course, there are certain boundaries to the application of these four issues. First, because the EU remains a regulatory state, it is not completely striking that new environmental policy instruments are used to a meager degree throughout the EU. In addition, EU environmental policy has become a rather significant section of EU activity and as a result it doesn’t fit with softer policy instruments such as the OMC (which primarily involves less important areas like employment and social policies).

In this chapter, we are going to discuss the informational policy instruments and more specifically the eco-labels and the environmental management schemes (EMSs). Despite the fact that eco-labels and EMSs are considered as two separate schemes, they both share the ability to help the participants to revise and make public of their environmental performance. Apart from their informational role, both eco-labels and EMSs also act as voluntary policy instruments schemes that introduce a self-regulatory process in which the actors abide by certain environmental performance preconditions (especially when it comes to eco-label schemes) and environmental audits (especially when it comes to EMSs). Informational policy instruments are sometimes characterized as ‘moral oppression instruments’ because they communicate to consumers standardised information concerning the effects on the environment of various products.

Taking advantage of this situation, many corporations which are part of markets with public environmental awareness and ecological elements, are often motivated to adopt eco-label schemes and/or EMSs especially if their antagonists have already done so. The first country which introduced an eco-label scheme was Germany. At the early 90’s many other countries along with the EU followed this example. However, the spread of eco-label schemes didn’t include all of the EU’s member states. In spite of the rise of eco-label schemes, the appropriation of EMSs in Europe was characterized by another follower-leader pattern. As a result, rivals took place among EU and international EMSs. Eco-label schemes were mainly made to help the consumers to check the environmental sustainability of their products. Especially in markets with ‘green consenciousness’, many companies choose to adopt eco-labels in order to have a competitive advantage. On the contrary, in markets with a lower level of ‘green consenciousness’, eco-labels are often used as a means to raise public environmental awareness.

The OECD splits the eco-label schemes into 3 sub-types: Type I – schemes verified by third-party institutions, Type II – semi-certified schemes by manufacturers and/or retailers and Type III – schemes with unique characteristics based on a specific product’s features. Type I eco-label schemes were first established in Europe (specifically in Germany) where they were welcomed counter to other member states which were not so receptive. Type II schemes are popular among companies although they are not so popular when it comes to implementation. Type III schemes are mainly directed towards goods with special features and for this reason are not broadly used. Because of these conditions, we are going to primarily focus on Type I eco-label schemes. The first EU regulation that introduces eco-management and audit schemes (EMAS) was called EMAS I. It describes EMSs as ‘the part of the total management structure and other conditions regarding the implementation of environmental policy’. EMAS I started being in effect in 1995 and has since been revised twice. EMAS II did in 2001 and EMAS III in 2010. EMSs define the environmental conditions in which companies can commercialize their products.

The goal is to achieve a constant improvement: all corporations should revise the environmental impact of their products and try to meet the specifications of a third party environment verifier who will test them impartially. The concept of an EMS comes from the US, where certain companies adopted auditing practices in the early 70’s. A raise in industrial accidents was noted contrary to the fact that environmental regulation was increasing at the time. Because of this situation, the various corporations started auditing themselves to comply more easily with the rules. The International Chamber of Commerce issued a document in the late 80’s, concerning the environmental auditing. During that period many EU member states started welcoming auditing, supporting the ICC’s thesis. EMSs like the EMAS and the International Standard Organisation’s (ISO) 14001 standard make corporations aware of their effect on the environment. Despite their differences, both schemes try to encourage auditing as well as monitoring and reduction of the environmental impact. However, not all companies can be subject to these schemes as they need to meet certain requirements. Even though these schemes aren’t obligatory, many companies adopt them to show corporal social responsibility.

The course of the EU eco-label has been doubtful since its beginning. The Commission introduced the first label in 1991. There were conflicts about the matter of coordination and control of the EU eco-label by the Commission. The European Parliament was in favor of the participation of various shareholders at all stages of the schemes, while at the same time promoting the coexistence of both the EU and national schemes. The actual definition of the EU eco-label scheme is: a scheme that endorses products and services that are less harmful for the environment correlating with relevant products and services. It is granted for a period of up to 3 years, based on certain conditions concerning the kind of each product/service.

All applications related to the EU eco-label must be submitted to each state’s Competent Body and then carried forward to an Advisory Committee. This Committee consists of members from the Competent Bodies which are moderated by the Commission. Also, the Committee defines the product groups and qualifications that member states should later break down and examine. During the period between 1992 and 1995, the EU eco-label was granted only in two firms. In 2000, the number rose to 41 schemes across 15 countries. After a revision in 2000, there were approximately 184 EU eco-label schemes but their number was still relatively small. A surprising fact concerning the EU eco-label is that many countries which don’t have a national eco-label, aren’t very eager to adopt an EU eco-label at all. On the other hand, member states which have adopted their own national eco-label schemes, tend to consider theirs to be more austere contrary to the EU eco-label which is more diverse. In addition, the lower consumer recognition makes companies skeptical about adopting the EU eco-label, as they consider it costly and difficult to use.

In early 2004, many corporations from various countries (Italy, France, Denmark) adopted a huge amount of EU eco-labels. This mainly concerned large companies while small or medium companies chose their nation’s eco-labels. The firms which are about to introduce an eco-label that isn’t EU’s, will have to face the issue of making the label known to the consumers. Simply the fact that a company uses an EU eco-label, can make it extremely competitive. In 2001, most EU eco-label licences were granted to: i) tourist accommodation services, ii) all-purpose and sanitary cleaners, iii) indoor and outdoor paints. However, the majority of EU product groups wasn’t able to be awarded with an eco-label. Especially, the white goods (such as fridges) faced the most difficulties despite the fact that they already held energy efficiency labels. In addition to the competition with various national schemes, the EU eco-label also faced other issues. One of them was that many member states distrusted its decision-making process. Another was the difference regarding the fixed charges between the EU eco-label and the national schemes. Finally, there were hints that the EU eco-label violated certain WTO rules. The Commission concluded that the EU eco-label suffered from: i) low public awareness, ii) a small number of product groups, iii) unwieldy procedures, iv) an uneven geographic dispersion. As a result, a revision was proposed. The EU eco-label was revised in 2000 (instead of 1997 when it was initially planned) because of discords between the European Parliament, the Commission and the Council.

The Commission was in favor of the abolishment of national schemes while the Council was in favor of the co-existence of EU and member state schemes. The newly EU eco-label scheme was appointed an Eco-labeling Board which was made up of national Competent Bodies. It was characterized by higher consumer involvement and also associated the EU eco-label schemes with EMAS. In 2006, the Commission suggested that the EU eco-label and the EMAS should merge in order to achieve growth. This didn’t happen and the Commission ultimately praised the EU eco-label. The companies that had adopted the scheme preferred it because of its performance and non-users treated it as a benchmark. The revision of the EU eco-label has a result the higher level of absorption by member states. Transparency, lower fees and the improvement of the decision-making process led to this admittance. The leading countries which adopted the EU eco-label were Germany, Spain, Italy and France. As far as product groups were concerned, there was a significant increase in the number of EU eco-label licences for sanitary cleaners, tourist accommodation services, textiles and paints. The leading product group was different in each country.

The fact that certain countries started adopting their own national environmental management schemes had a negative impact on European industrial associations. Many considered the EMAS I to be much stricter than other standards (such as Germany’s and UK’s), as it constantly reduced the environmental impact and required a closer self-audit. Also, EMAS I contained frequent revisions of the environmental targets and let out further information about environmental performance. In 1996, the ISO 14001 was adopted. It was much more lenient than the EMAS I as far as premises for environmental statement were concerned. As a result, many corporations (both European and international) chose to adopt this standard. In 2001, the EU revised EMAS I in order to: i) expand its application in other sectors (such as public authorities and NGOs), ii) highlight any secondary environmental effects, iii) focus in public reporting.

This newly reformed EMAS II pointed out the intense ‘rivalry’ of the EMAS I and the ISO 14001. As a matter of fact, one of the targets of the revision, was to make EMAS II more similar to the ISO 14001 without, however, stripping it of its stricter elements. The 2001 revision came into force in 2004. Public companies were now capable of taking part in EMAS (not only private) and the application of EMAS expanded in all economic sectors. ***The first organisation which achieved it was the Environment Agency in Germany. However, despite of the extension of EMAS, the fulfillment of requirements for industrial sites made the ISO 14001 even more popular among countries. Germany holds the dominant position and other countries such as Austria, Spain, Italy and the Netherlands follow.

The revision of EMAS II came across with a lot of controversy by certain European environmental and consumer groups. They pushed for a better evaluation system when it comes to the schemes and also for a more substantial revision overall. Consequently, the Commission started trying to improve EMAS in every possible way. Firstly, DG Environment came up with ways to link EMAS with the Integrated Pollution Prevention and Control (IPPC) Directive. In 2007, the idea of a new revision started growing. Three years later, EMAS III became operational. EMAS III required all eco-audited organisations to issue a report, ensuring that they weren’t breaching any environmental laws. Also, the new scheme introduced one single EMAS logo for all products. In 2007, there were almost ten times more ISO 14001 registered organisations than EMAS-registered. This led the Commission to a search of ways to increase motivation, by allowing non-EU or EU-associated organisations to join.

Voluntary agreements (Vas) are basically commitments from companies that they will follow a specific procedure. Although, these agreements are not applied by force, we sometimes have a certain degree of necessitation that governmental actors pass on societal actors. Vas started being used in the early 70’s, primarily by Germany and the Netherlands. It was only after decades that Vas became known among other EU member states. Over the years there have been definitions to describe the VAs. The European Environment Agency (EEA) defined them as ‘covering only those commitments undertaken by firms and sector associations, which are the result of negotiations with public authorities and/or explicitly recognized by the authorities’, while the Commission described them as ‘agreements between industry and public authorities on the achievement of environmental objectives’. It was during the late 80’s that the EU decided to start adopting Vas.

One reason for this decision of the environmental policy makers was the increasing competition (as a result of globalization). In addition, many new policy issues (such as climate change) started to emerge and they couldn’t be dealt with conventional regulatory processes, making Vas indispensable. In 2002 there was a proposition for introducing 7 different types of EU-wide VAs. However, most of them were overreached as they suggested a Treaty amendment to impose a legal base for VAs, while other suggested cross-sectoral collaborations and other EMAS-like schemes. As a result, the Commission eventually rejected most of these options (after being advised to do so by the Legal Service) because it considered them to be too insubstantial. During the same year, a Commission’s statement referred to the need of creating additional environmental agreements before 2004. These concerned 4 areas: Polyvinyl chloride (PVC) management, Integrated Product Policy, climate change and waste management. However, there was still low acceptance of the VAs in the EU due to issues of legality and transparency.

The EP was strongly against the Commission’s decision to increase the use of VAs in the EU, except for the PVC report. Also, there were many environmental groups which entertained doubts about the use of VAs. In the same way, European industry backed the expansion of EU-wide VAs but didn’t support openly the Commission’s efforts to promote them. Competition grew among national VAs and the EU-wide VAs. Germany, Austria and the Netherlands were the most competitive countries when it came to these agreements. Also, the fact that certain free-riders surfaced, led the Commission to the increase of EU-wide VAs. Substantially, free-riders were parties who gained a competitive advantage in the market every time they couldn’t implement the VAs. This didn’t have any sanctions as the VAs aren’t legally binding. Moreover, the Commission noticed that not all industry sectors have their own associations, making it difficult to introduce new VAs.

Notably, the majority of EU-wide VAs has been adopted by the automobile and the chemical industry. The first 4 EU-wide VAs were adopted in the late 80’s and they all concerned chemicals. Three of them contained reduction targets for Chlorofluorocarbons (CFCs) and the fourth regarded detergents. In 1999, the Commission and the association of the European automobile industry (ACEA) arrived at a decision for a VA which would reduce carbon dioxide (CO2) emissions for passenger cars. Both the EP and the Council where monitoring the negotiations from the start, as they have set the reduction targets. The negotiation lasted for almost 5 years and in the end both the Commission and the ACEA characterized this agreement as ‘a great success’. The VA fixed the CO2 emission reduction at 140g/km by 2008 but some environmental groups considered it to be too scant. In 2004, certain automobile corporations (especially in Germany) started having second thoughts about the effectiveness of VAs.

They pointed out at the governments of member states the level of competition while pushing for less strict CO2 emission reduction targets. Two years later, ACEA held the consumers responsible for the failure of the CO2 emissions VA, by stating that they choose more fuel efficient vehicles. The Commission, in turn, expressed its discontent about the automobile industry’s slow progress and warned that it would substitute the VA for a legally binding legislation. In 2007, the Commission, realizing that the emissions target wouldn’t be reached by 2012 without extra interference, proposed a binding EU legislation. The legislation forced automobile companies to reduce their CO2 emissions from new vehicles to 120g/km by 2015. The OECD was also quite skeptical about the efficiency and effectiveness of VAs. However, despite the fact that most European companies were disappointed by the VAs, the industry in general was in favor of them instead of binding of EU legislation. Between 1998 and 2004, only two EU-wide VAs were adopted in addition to the VA on CO2 emissions.

The first concerned mercury and pesticides and the second biodegradable plastic. Other areas which gained attention for adoption of VAs were: climate change (electrical engineering applications), batteries’ components and imaging equipment (such as photocopiers). Through the years, VAs have remained an environmental policy option for member states. Since the late 90’s, most VAs have been considered as a secondary tool within a wider policy mix. VAs along with eco-label schemes, EMSs, eco-taxes and emissions trading constitute the main components of the EU strategy. In order to motivate companies to adopt the VAs, the Commission created a supplementary framework: the eco-design Directive. This Directive sets certain preconditions for products that have an impact on energy consumption. The Commission is free to impose various requirements to companies that adopt the eco-design Directive. By 2011 there were only 14 EU-wide VAs. Their number is extremely small if we take into consideration that there were hundreds of national VAs across the EU. This ‘unpopularity’ of the VAs continues due to various reasons. Some of them are: the lack of a Treaty-based character of the VAs, the dispute over their effectiveness by some EU institutions (such as the EP) and the overall institutional status of the EU.

When it comes to environmental governance, market-based instruments have a leading position. Certain European countries (especially in the North) have been using eco-taxes since the late 70’s, despite the fact that these eco-taxes were based on Pigou’s theoretical work back in the 1920’s. Economists throughout the world praise eco-taxes as they point out the costs of negative environmental externalities. Energy taxes account for more than 50% of the eco-taxes in the EU, with Germany, France and Italy being the leading countries. At first, eco-taxes had the form of a charge on specific pollution. However, by the mid-1970’s, certain countries in the north as well as Germany, France and the Netherlands, have expanded the use of eco-taxes on water and air pollution. By the late 90’s, there is an overall eco-tax reformation.

The main reason was to increase the cost of the consumption of non-renewable resources or polluting activities while using the generated revenue to reduce labor cost. Germany and the Netherlands were once more the pioneers. Between 1970 and 1990, merely the thought of using eco-taxes as a supplementary environmental policy instrument was absent. Despite the fact that certain member states adopted various eco-taxes, traditional regulation continued to be the main EU environmental policy tool. It was only during the end of the 80’s that eco-taxes for carbon dioxide were first introduced by the DG Environment. One of the main reasons was of course global warming and the greenhouse effect. Public awareness within the member states led to the development of alternative environmental policy instruments. In 1992 the members of the DG Environment concluded that they should emphasize on a common carbon dioxide/energy tax. The same year, in the UN Rio Earth Summit, it was stressed that eco-taxes would help the EU boost its global role and broaden the Commission’s scope of influence. While some countries (such as Germany and the Netherlands) backed EU’s decision for an eco-tax, there were many that opposed to the idea for their own speculative reasons. However, EU was still unable to create a proper eco-tax. As a result, a group of like-minded countries started discussing the characteristics of national eco-taxes and the requirements for a united carbon dioxide/energy tax. In 1997, a Directive was introduced by the Commission in order to align member states’ taxation on energy products. Although there were reactions, in the end member states came to an agreement regarding certain basic principles.

In 2003, the Finance Ministers finally agreed on a framework directive that included various economic sectors. The EP, having doubts about the effectiveness of the Directive, proposed a revision but the Commission rejected it. On 27 October 2003, the Economic and Finance Minister Council (ECOFIN) formally adopted the Energy Tax Directive (2003/96/EC). The Directive included tax measures for energy products such as coal, natural gas and electricity. Having successfully introduced the Energy Tax Directive, the Commission tried to find ways to improve it. One of them was the suggestion of an eco-tax on passenger cars. Member states were bound that by 2010 at least 50% of passenger car taxes would be proportionate to the CO2 emissions. Moreover, the Commission tried to introduce a CO2 tax on imports from third party countries which couldn’t meet the requirements for greenhouse gas emissions, but most member states voted against it. In 2009, a revision was planned by the DG for taxation, in order to conform the Directive with the EU’s climate and energy objectives. This revision would eventually concern fuels for cars and heating and electricity production.

The principle idea behind emissions trading is relatively simple and universal to all emission trading schemes (ETS). States and/or corporations are provided with emission ‘allowances’ which can be traded in the market place. Naturally, all ETS have differences depending, for example, on their cost (some are free while other are sold through auctions). The cap-and-trade ETS sets the limit of the emission that states and/or corporations are allowed to release while the market sets the price of these ‘permits’. In theory, there is an upper/lower limit for the price of emission allowances but in practice none of the existing ETS uses one. The amount of the emission allowances that are granted (supply) affects directly their price through scarcity. As a result, states and/or companies are compelled to reduce their emissions. This way, new emission reduction technologies emerge as competition among parties increases. The idea of emissions trading was first introduced in the 1997 Kyoto Protocol.

The Commission, disappointed by its incompetence to introduce a proper carbon dioxide/energy tax without flaws, tried to introduce a more cost-efficient market-based instrument. Several DG Environment officials came up with the idea of endorsing emissions trading in order to tackle climate change. In 2000, the Commission published a Green Paper on Greenhouse Gas Emission Trading within the EU. After consulting various member governments, the Commission ultimately issued an EU ETS proposal in 2001. Two years later, both the EP and the Environmental Council adopted the proposal after laborious negotiations. At first, the EP proposed approximately 60 amendments to improve the efficiency of the scheme and later 14 more were added. The focus of the EP and the Environmental Council shifted towards the structure of the scheme and not towards technicalities. Each member state has to implement its own rules regarding the function of schemes which were called national allocation plans (NAPs). As a result, the EU ETS became a highly decentralized scheme and many countries chose not to follow the Commission’s instructions. It was this situation that led to the quick adoption of the Commission’s proposal. Also, it was imperative to introduce a functioning EU ETS before the Kyoto Protocol entered into force in 2005 and thus the Environmental Council and the EP consented to it right away.

In 2003 the Commission proposed a so-called linking directive. It connected the EU ETS with certain mechanisms in the Kyoto Protocol, namely the clean development mechanism (CDM) and joint implementation (JI). The CDM grants developed countries the emission reduction units (ERUs), which can be traded within the EU ETS, for sponsoring certified greenhouse gas emission reduction projects in developing countries. JI allows developed countries (listed in Kyoto Protocol) to implement jointly greenhouse gas emission reduction projects. In 2005, the EU ETS came into force. It was applied in approximately 10.000 sites in the energy and industrial sectors which account for almost 50% of Europe’s emissions of CO2. The EU ETS is divided into 2 trading phases: the first from 2005-2007 and the second from 2008-2012. During the first phase, the main pillars were set up and during the second, which was also Kyoto Protocol’s first trading phase, there was a refinement of the rules. A third trading phase (2013-2020) was added during the revision of the EU ETS. Germany had the majority of its sites covered by the EU ETS, since it had the highest levels of CO2 emissions in the EU. Almost 60% of these emissions were covered by the EU ETS.

Also, almost 50% of its emission allowances were used by the 4 largest energy producers. Other countries with corporations which used emission allowances were Austria and the Netherlands. During the two trading phases, countries had to implement NAPs which set limits regarding the CO2 emissions in order for them to converge with the Kyoto Protocol reduction target. Naturally, each member state had different reduction targets, depending on its capacity. In the Netherlands, the government was getting ready for the introduction of the EU ETS with the Dutch Emissions Authority (NEA) being responsible for its implementation. NEA was in charge of monitoring the procedures and of making sure that everything would function by due process. Also, NEA issued annual emission monitoring reports and sanctioned firms’ protocols. In its first year (2005), NEA had already granted almost 200 allowances which accounted for 95% of the country’s industry. In the end, the EU ETS was implemented by the Environment and Economics Ministries. In addition, the Ministry of Finance dealt with issues of auctioning and the income that derived from it. In Germany the NAP-I (NAP of the first trading phase) was introduced in 2004 and was approved by the Commission the same year. Because of the political instability of that time, many firms showed their opposition to the EU ETS by taking legal action against it. However, the courts largely backed the government’s position. The German NAP-I was extremely complex-it contained almost different provisions for distributing allowances.

That was mainly because Germany had the largest number of sites (from a variety of industrial sectors) which used the EU ETS. In addition, Germany has always been an ambitious country when it came to reduction targets. The NAP-I was fully integrated as it blended successfully with all the previous laws and environmental policy instruments. In 2004 there was a dispute between the Environment and Economics Ministries about the actual function of the NAP-I. However, after negotiations, all parties came to an agreement to set the cap at 503 million tons. Also, after the negotiations, the carbon dioxide coal industry was benefited with new allocation rules. The price for emissions allowances was low during much of the first trading phase. In 2006, the results showed that the CO2 emissions which were released, were disproportionate compared to the number of allowances that were granted. As a result, the price of the allowances fell to about one third of the initial price. One year later, the price declined markedly (less than 1 euro/ton). In the end of the first phase, the Commission concluded that it was overall an educational period which taught many things to countries. In 2007 the second trading phase was initiated and was marked by the implementation of the EU ETS. In Germany, the NAP-II was introduced and it contained an auctioning of 7% of the national CO2 emission allowances. After the elections in 2005 there was a slight dispute between the Economics and Environment Ministries concerning the emissions trading.

Many government officials pushed for a 10% auctioning option but in the end, a compromise was reached at 8,8 %. The NAP-II in Germany set the limit at around 480 million tons for carbon dioxide emissions but the Commission refused to accept it because it deviated from the Kyoto Protocol reduction target. The Economics Ministry wanted to file a complaint to the Commission but eventually the government accepted it. This happened for two reasons. First, a legal challenge would have created uncertainty for German industry and second, Germany wanted to be a reliable and reputable member state of the EU. In the Netherlands, there were difficulties in the implementation of the EU ETS. The Dutch Court of Audit considered that the NAP-II was not very effective when it came to CO2 emission reduction and that it would sabotage the government’s commitment to the Kyoto Protocol. As a result, the Commission urged the government to implement a stricter NAP-II cap.

The same happened with 9 other member states-the Commission requested an average reduction of emissions of around 7%. The European Environmental Agency detected many member states differences during the implementation of the EU ETS. Consequently, it pushed for an increased harmonization of the EU ETS by easing the demands of the Emission Trading Directive. In 2008 the aviation sector was added to the EU ETS through a Directive (2008/101/EC) introduced by the Council and EP. Moreover, the Commission tried to establish a way to include the shipping industry. Despite the fact that there were objections for the use of the Directive by countries like China and USA, in the end the ECJ decided that it was in accordance with EU legislation. During the third trading phase (2013-2020) the EU ETS was revised in order to fix certain flaws of the rules of the first two trading phases. Almost all member states faced the fact that the EU ETS should become more centralized with more coordinated procedures. The most important points of the revision were: i) the use of a single EU-wide cap, ii) the auctioning process will become the main allocation method for allowances, iii) benchmarking for industrial sectors will be introduced, iv) the rules for Joint Implementation and Clean Development Mechanism will be present in the new Directive. Between 2009 and 2011, the EU ETS has fallen victim to several attacks by criminal hackers. In these years, many millions were stolen and the tax authorities were defrauded many times. In order to ensure the functioning of the market-based EU ETS, state authorities had to crack down on fraudsters.

In recent years, renewable energy sources (RES) have gained a lot of importance around the globe. The technologies which are connected with RES are evolving rapidly and occupy a dominant position in energy generation. In fact, only in 2009, almost 60% of newly installed capacity in Europe came from RES. The Commission has already set certain targets for the use of RES. The Directive 2009/28/EC dictates mandatory national targets which account for a 20% of energy from renewable sources and a 10% of energy from renewable sources in transport by 2020. RES are about to play an even more important role in the EU’s environmental policy. Many member states have already begun incorporating RES in their energy generation procedure. For example, Denmark announced in 2011 that more than half of its electricity production will come from RES while Germany has set a target of 35% for RES use concerning its electricity consumption. However, the high cost of integrating RES technology has raised many concerns and has resulted in the need for regulatory intervention.

Member states’ governments and regulatory agencies are trying to create the proper framework in order to control the integration of RES technologies into the larger generation mix. Naturally, there is a dispute for the use of RES support schemes and the existing industrial frameworks. In practice, the biggest challenge is to replace previous polluting technologies with RES technologies and of course their cost. These and some other issues pose the question of how the RES are going to be properly exploited and supported financially by states, The economic view is an essential part of renewable energy deployment and its progress. The renewable energy technologies have to be extremely competitive in order to tackle the conventional resource technologies. However, it is difficult to compare the actual costs that derive from them. In spite of the challenges, RES should contribute to the total energy supply in order to abate the negative effects of climate change. The types of support mechanisms that are used the most are feed-in-tariffs and tax incentives. Other schemes are capital grants, utility procurement, grants to infrastructure, etc. Taking into consideration the fact that most of the applications of RES technologies concern small-scale production

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