The Making of the 2003 EU Emissions Trading Directive

The Making of the 2003 EU Emissions Trading Directive
Jørgen Wettestad

The Making of the 2003 EU Emissions
Trading Directive: An Ultra-Quick
Process due to Entrepreneurial
Proªciency?

•
Jørgen Wettestad*

Against the backdrop of the June 2003 political agreement between the Euro-
pean Parliament and the EU Council on a greenhouse gas emissions trading
(GHG ET) system, the ET Directive was formally adopted in October 2003
(Directive 2003/87/EC).1 It means in effect that the Union’s climate policy strat-
egy is near to completing its about turn. Throughout most of the 1990s, the EU
had been the leading skeptic in global climate diplomacy to emissions trading,
favoring instead coordinated policies and measures.2 On the basis of the ET
Directive, which outlines a cap-and-trade scheme for large industrial emitters
from 2005, the EU stands forth as the major frontrunner in the development of
an international market place for emissions trading.3 According to the EU Com-
missioner for the Environment, Margot Wallström, the scheme “represents a
major innovation for environmental policy in Europe . . . [and] will be an
important cornerstone in our strategy to reduce emissions in the most cost-
effective way.”4 In a similar vein, the ENDS Report stated in June 2003 that “the
EU emissions trading scheme looks set to be one of the most far-reaching and

* This article has benefited from very helpful comments from Atle C. Christiansen, Dag H. Claes,
Per O. Eikeland, Henrik Hasselknippe, Kristin Rosendal, Jon B. Skjærseth, Olav S. Stokke, and
three anonymous reviewers. Many thanks to Ivar Liseter for formatting assistance and Chris
Saunders for language polishing. This article is part of a two-year project at The Fridtjof Nansen
Institute on “The EU Emissions Trading Scheme: Key conditions and prospects for effective-
ness,” financed by the Norwegian Research Council under the “SAMSTEMT” program. See
http://www.fni.no/.

1. EU Commission 2003. In addition, the Council and the European Parliament reached agree-
ment on a directive on the links between the EU ET system and the Kyoto Protocol’s ºexible
mechanisms on 20 April 2004. This was formally adopted by the Council on 13 September
2004. For a good introduction to and overview of emissions trading as a policy instrument, see
IEA 2002.

2. Wettestad 2001.
3. Christiansen and Wettestad 2003.
4. European Commission 2001a.

Global Environmental Politics 5:1, February 2005
© 2005 by the Massachusetts Institute of Technology

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2 • The Making of the 2003 EU Emissions Trading Directive

radical environmental policies for many years,”5 and the scheme has also been
characterized as “the new grand policy experiment.”6

The process offers intriguing puzzles, both with regard to developments so
far and, not least, its effectiveness and likelihood of success. For instance, the
very about-turn of the EU “from ET ªend to frontrunner” has attracted some
scholarly attention.7 This article explores other aspects of the EU ET policy-
making process. First, given the EU’s earlier resistance to this market-based in-
strument with no international track record and with US origins, the EU ET pro-
cess could be termed an ultra-quick political “pregnancy.” For instance, the main
design of this complex scheme was in place less than two years after the Com-
mission launched its directive proposal in October 2001. In stark contrast, the
process of getting an EU energy tax adopted took six years, and even twice as
long if we adopt the carbon tax initiative in the early 1990s as the true starting
point of this process. Another interesting aspect related to the EU process is the
extraordinarily strong role of the Commission throughout, with, for instance, the
2003 Directive outcome quite close to the 2001 Commission proposal and ar-
guably only marginally altered by the European Parliament and the Council of
Ministers (see table on p. 6). These conundrums may of course be connected.
The strong entrepreneurial role of the Commission may explain much of the
velocity of the process.

Hence, section one will start with an overview of the decision-making pro-
cess. Based on a summary of the milestones of the process, why is it meaningful
to characterize it as “ultra-quick”?

In section two, we review likely explanations for this speediness. First, re-
maining with the pregnancy metaphor, any experienced physician would in-
quire into the pregnancy’s date of conception. Had the EU actually been pregnant
with this idea for some time when talks about emissions trading picked up
speed in 1998; could it be that the process in reality started when the EU started
to develop climate policy back in the early 1990s? If so, it would mean that de-
veloping an EU ET scheme was a less malign collaborative problem than one
might have assumed.8 Second, could it be that a particularly resourceful “midwife”
helped shorten the “pregnancy”? This of course refers to the seemingly dominant
role of the Commission indicated above. Could it be that a uniªed and strong
Commission provided the entrepreneurial substance needed to install this com-
plex system in record time, hence contributing to the sort of problem-solving
capacity sorely lacking in other international contexts?9 Third, it is common
knowledge that external impulses and shocks can speed up decision-making pro-

5. ENDS Report 2003, 18.
6. Kruger and Pizer 2004, 1.
7. See, for example, Christiansen and Wettestad 2003; and Damro and Luaces Mendes 2003.
8. Arild Underdal proposes two central perspectives for understanding the effectiveness of policy-
making processes: central problem characteristics versus problem-solving capacity. See
Underdal 2002.

9. Underdal 2002; and Miles et al. 2002.

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Jørgen Wettestad

• 3

cesses (and, unfortunately, pregnancies too). Such impulses and shocks imply
interaction, linkages and learning in relation to bodies, actors and processes
outside of the EU.10 Among other things, it would be pertinent here to consider
whether the US withdrawal from the Kyoto Protocol process in March 200111
opened a window of opportunity for the EU to take over the reins of global cli-
mate leadership, and spurred the development of internal EU climate policy.

Finally, section three sums up central ªndings. A central thesis of the arti-
cle is that the speed and character of the process cannot be understood without
taking all three explanatory perspectives into account separately and in conjunc-
tion. To close, we offer some brief reºections on implications for the future ef-
fectiveness of the system. Does an “ultra-quick pregnancy” mean a prematurely
born “baby”?

1. The Making of the EU Emissions Trading Directive—Was it Really
Ultra-Quick?

Let us ªrst take a quick look at the shaping of the ET Directive and important
milestones in that connection. The ªrst positive ET signals from Environment
Commissioner Bjerregaard could be noted in June 1998, at which point she
said that “we have to get involved in emissions trading [ . . . ] we cannot let oth-
ers dictate the rules.”12 The climate change communication published that same
month stated moreover that “the Community could set up its own internal trad-
ing regime by 2005.”13 The ªrst EU document to draft a possible EU system was
the 1999 Communication on Kyoto implementation.14 Not very much was said
about ET here, though it was noted that although a broad and comprehensive
system was the ideal in order to maximize the cost-effectiveness of the system, it
was more feasible to start with large emitters or a single sector. Quite naturally,
the connection to the two other main ºexibility mechanisms in the Kyoto Pro-
tocol, i.e. the Joint Implementation (JI) and the Clean Development Mecha-
nism (CDM), was brieºy commented upon.15 It was noted that the CDM could
start as early as 2000.16

Nevertheless, it was really the 2000 ET Green Paper that started to put
meat on the EU ET scheme bone.17 The Green Paper outlined several options
with regard to the bindingness of the system, including a more ºexible “opt-in”
clause for the genuinely interested Member States and “opt-out” clauses for cer-
tain sectors. With regard to the allocation of “allowances” (i.e. the quantity of

10. See, for example, Rosendal 2001; Stokke 2001; and Oberthur and Gehring 2003.
11. The Kyoto Protocol was adopted in 1997 under the United Nations Framework Convention on
Climate Change (UNFCCC). See, for example, Grubb et al. 1999; and Oberthur and Ott 1999.

12. International Environment Reporter 1998, 609.
13. European Commission 1998, 609.
14. European Commission 1999.
15. Ibid, 16–18.
16. Ibid, 17.
17. European Commission 2000.

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4 • The Making of the 2003 EU Emissions Trading Directive

greenhouse gas emissions assigned to each participant in the system), an im-
plicit plea was made for a centralized setting of the national ceilings or “caps.”18
A more decentralized approach would require “detailed and tight guidelines on
how allocations are made in individual sectors and companies, and close scru-
tiny of every single case.”19 The Paper also indicated on the distribution of al-
lowances and method of allocation that it saw auctioning as the technically
preferable method and that “free allocation should not be an easy option.”20

That said, a comprehensive draft did not emerge until the Commission’s
Directive proposal of October 2001.21 This proposal was deªned as an “environ-
mental measure” and hence based on Article 175 (1) of the EU Treaty, which
meant adoption by a qualiªed majority in the Council and co-decision with the
European Parliament.22 The proposal suggested a basically mandatory system,
starting with a limited number of sectors and carbon dioxide (CO2) emissions
only; allocation of allowances by grandfathering, with the 1997 Burden Sharing
Agreement as the foundation; a penalty for non-compliance of 50 Euro (or
twice the average market price) per ton CO2 emitted above allocated quantity;
and the inclusion of JI and CDM credits “not foreseen,” but to be further ad-
dressed in a subsequent directive. However, it should already here be noted that
although a mandatory character was envisaged for the system, national control
over cap setting gave it a fundamentally decentralized character compared to the
US sulphur dioxide (SO2) and nitrogen oxides (NOx) trading systems.23 Syn-
ergies with the 1996 Integrated Pollution Prevention and Control (IPPC) Direc-
tive were particularly emphasized and explored, as was compatibility with the
process of liberalizing energy markets.

According to the co-decision procedure, the next step in the decision-
making process was the First Reading discussion in the European Parliament.
This process took place in the fall of 2002 and ended with the adoption of
more than 80 amendments. Among the most important changes suggested by
the Parliament was a considerable broadening of the scope of the scheme.
Parliament also wanted to see more sectors included, among them the chemical
industry and aluminum plants, along with coverage of all the main six green-
house gases.24

The time had now come for the Council of Environmental Ministers to

18. Cf. the statement that “If the Community were to agree on the quantity of emissions of the trad-
ing sectors in each Member State, possible distorting allocations to individual sectors or compa-
nies would be signiªcantly limited” (European Commission 2000, 18).

19. Ibid, 18.
20. “Allowances” is the same concept as “assigned amount units” (AAUs) under the Kyoto Protocol.
However, AAUs can also stem from Joint Implementation and Clean Development Mechanism
projects.

21. European Commission 2001b.
22. In contrast, the carbon/energy tax proposals had been put forward under the consultation pro-

cedure (now Article 175(2)), which requires unanimity in the Council.

23. See Kruger and Pizer 2004.
24. Europe Environment 2002.

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Jørgen Wettestad

• 5

discuss and adopt a Common Position on the ET proposal. This discussion took
place in December 2002. The Council chose to uphold the body of the Com-
mission’s design put forward a year earlier. EU Environment Commissioner
Margot Wallstrøm was “extremely pleased” that the architecture and main de-
sign of the European Commission’s proposal had remained in place.25 Still,
some minor changes were introduced. These included an option for Member
States to allow installations within industrial sectors to form trading pools; a
limited right for Member States to exempt (“opt out”) individual installations
or industry sectors in the period up to 2008 (but with a right of veto for the
Commission); an opening for an extension of the system to other sectors and
other gases from 2008 (but also with a Commission veto right); and a possibil-
ity for Member States to auction up to 10 percent of allowances from 2008.26

The next step in the procedure was a Second Reading in the European Par-
liament. When the Parliament started this second reading process in the spring
of 2003, it was in an atmosphere of some political urgency. For instance, the
Parliament’s ET Rapporteur Moreira da Silva stated on 22 May: “If we postpone
a decision it will create enormous problems for national authorities and compa-
nies.”27 Despite his urgings, however, the Parliament’s Environment Committee
re-tabled 25 of the amendments put forward in the First Reading process and
identiªed ªve really key issues for this ªnal phase. Among them were a national
ceiling for allowances; opt-outs only for installations, not sectors; and a revision
of the Directive in 2006 to include other sectors such as transport.28

The tension was now building up. Would the EU bodies agree—or would
they end up as they often do, in additional and prolonged negotiations in a for-
mal Conciliation Committee?29 The breakthrough then took place on 25 June
2003. In this ªnal agreement struck between the Parliament and the Council,
some limited concessions were obtained by the Parliament. First and foremost,
there was an opt-out limitation during the initial phase of the system for instal-
lations rather than whole sectors.30 But the basic architecture of the ªnal
system retained essentially the Commission’s October 2001 proposal and the
Council’s December 2002 Common Position. Table 1 summarizes the steps of
the process.31

Summing up, although the system’s ªrst tentative pillars were imple-
mented in 1999 and 2000, its main design was in place less than two years after
the Commission tabled its initial October 2001 proposal. As noted, given the

25. ENDS Daily 2002.
26. Euractiv 2002.
27. Reuters/Planet Ark 2003.
28. Euractiv 2003a.
29. If the Council and Parliament fail to reach an agreement after the second reading in the Parlia-
ment, a Conciliation Committee (with equal Parliament and Council representation) is estab-
lished to come to a ªnal agreement.

30. Euractiv 2003b.
31. The design dimensions are roughly lifted from Christiansen and Wettestad 2003.

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8 • The Making of the 2003 EU Emissions Trading Directive

EU’s earlier resistance to emissions trading in the Kyoto negotiations, the rapid-
ity of the process does lend support to our fast-tracking hypothesis.32 It is appro-
priate now to explore factors and perspectives that might shed light on how and
why the process went so smoothly.

2. Shedding Light on the Speedy Decision-Making Process:
An Early Start; A Clever Entrepreneur—Or External Impulses?

2.1 A Clandestine Start? The Maturity of Emissions Trading as an Issue within the
EU by 1998

The initial regulatory focus in EU climate policy in the early 1990s was geared
on getting a carbon tax adopted. Emissions trading had been aired and dis-
cussed ªrst in academic and policy circles as a promising instrument, in light of
the high complexity of the climate change issue.33 Efforts to get a carbon tax
adopted had failed thus far because, as a ªscal matter, it required unanimity in
the Council of Ministers. Such an agreement was impossible to obtain; Member
States from North and South within the EU had various sorts of difªculties with
the tax, their opposition fuelled moreover by intense industrial lobbying.34
When the carbon tax was dressed up as an energy tax in 1997, the policy-makers
probably hoped it had leveled many of the bumps in the road. This hope waned
fast, as key European industries and Member States such as the UK and Spain
continued to mount vociferous opposition. Moreover, the other main elements
of EU climate policy—i.e. the SAVE energy efªciency program and the ALTENER
renewables program—remained weak and inadequate.35

Hence, by 1998, the EU had a serious climate policy hangover. Within the
global context of the UNFCCC, in Kyoto in December 1997, the Union had un-
dertaken to reduce greenhouse gases by 8 percent between 2008 and 2012, this
being the most ambitious reduction target within the group of main OECD ac-
tors.36 This was again based on the EU-internal target-sharing agreement, pre-
liminarily adopted in March 1997 and revised and formally adopted in June
1998.37 Although the target-sharing agreement clariªed the Member States’ ba-
sic separate responsibilities in this context, the need for effective common EU
policies in the ªeld of climate policy was becoming increasingly pressing.

If the EU’s failure to adopt effective climate policies can be seen as a
“push” factor paving the way for an EU emissions trading system, then the de-
velopment of other policies and processes from the mid 1990s could be seen as

32. Interviews carried out in May 2004 in Brussels with central participants in and observers of this
process lent further support to this assessment. See complete list of interviews at the end of this
article.

33. For example, Grubb 1989; Hansen and Roland 1990; Victor 1991; and OECD 1992.
34. Skjærseth 1993; and Wettestad 2000.
35. Wettestad 2001; and Hasselknippe and Christiansen 2003.
36. The US agreed to a 7% reduction target and Japan a 6% target.
37. Ringius 1997; and Wettestad 2001.

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Jørgen Wettestad

• 9

“pull” factors in favor of trading. One such policy was the developing IPPC per-
mission system. The Directive on Integrated Pollution Prevention and Control
(IPPC) was adopted in September 1996 (96/61/EC).38 It tied in with an increas-
ing realization that earlier legislation operating along medium-speciªc lines
(e.g. air, water etc.) were failing to address the important linkages between vari-
ous policy options and the “wholeness” of the environment.39 In essence, with-
out a comprehensive approach, stricter requirements on emissions to water
could easily lead to dangerous substances being incinerated and ending up as
air pollution instead.

Hence, the IPPC Directive required six categories of industries to be autho-
rized in order to attain “a high level of protection of the environment as a
whole”: energy; production and processing of metals; minerals; chemicals;
waste management; and “others” such as pulp and paper. The basic technology
requirement to be reºected in IPPC permits was “Best Available Technology”
(BAT). Article 2 of the IPPC Directive deªned “pollution” in a broad sense, but
did not explicitly include greenhouse gases. The Directive was of course not de-
signed with emissions trading in mind, but as the EU trading idea started to de-
velop, appreciation of the potential synergies with the IPPC permits which were
to be issued from 1999 on probably spread rapidly.40 In essence, the IPPC per-
mission system could be amended to include greenhouse gases and form the
regulatory blueprint for issuing GHG trading permits.41

Another “pull” factor may have been the drive for an EU energy policy
deregulation which started in the mid-1990s. In June 1996, proposals for elec-
tricity sector liberalization within the framework of an Internal Energy Market
were agreed at EU level.42 Since the deregulation drive aimed to bring down en-
ergy prices, there were worries that lower prices would be detrimental to the
stimulation of energy efªciency aimed at in the environmental and climate

38. The formal compliance and application deadline for new plants was 30 October 1999. Applica-

tions for existing plants were to take place by October 2007.

39. Haigh 2004.
40. However, it is clear is that there were also potential compatibility problems and the Commis-
sion issued a Non-Paper on this relationship in January 2002 (EU Commission 2002). Other
contributions discussing the relationship between IPPC and ET are for example, Fernandez
Armenteros 2002. Moreover, as pointed out by one of the reviewers of this manuscript, ironi-
cally, although the IPPC provides the permitting framework for the EU ETS, its underlying regu-
latory philosophy is quite different. It is built on a BAT technology mandate approach as op-
posed to a performance based standard (with trading) that does not mandate any one
technology.

41. In the Commission’s 2001 proposal, it is explicitly stated that “the sectoral coverage of this Di-
rective builds upon the framework of regulation arising from the IPPC Directive” (European
Commission 2001, 10). Hence, this means that the IPPC link may also have had restricting ele-
ments. In the EU Commission’s Non-Paper (EU Commission 2002b), it is noted that “for ad-
ministrative simplicity, Article 8 of the EU emissions trading proposal would allow Member
States to combine the permitting procedure for greenhouse gas emissions trading with that for
the IPPC Directive” (p. 2).

42. Collier 1998. The EU energy liberalization strategy is basically laid down in two directives: 96/
92/EC concerning common rules for the internal market in electricity and 98/30/EC, concern-
ing common rules for the internal market in gas. See Hasselknippe and Christiansen 2003, 27.

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10 • The Making of the 2003 EU Emissions Trading Directive

policy context. The initial hope was that a carbon tax could help counteract such
negative externalities of deregulation.43 However, as the prospects for such a tax
continued to look gloomy in 1997/98, it is possible that EU policy-makers in-
creasingly came to see ET as a (pricing) instrument which could stimulate both
energy policy deregulation and achieve energy efªciency and climate policy
goals.44

Yet another “pull” factor can be found within the industrial camp. As indi-
cated, EU industries were almost unanimously highly critical of the EU carbon
or energy tax initiatives, but market-based ET was another matter. By 1998, sev-
eral major oil companies had started to warm to the idea of emissions trading as
a central instrument of climate policy. British Petroleum (BP) started an internal
pilot GHG emissions trading system in September 1998, which they extended
to all BP business units in 2000 and 2001. Shell followed suit in 2000.45 Hence,
from 1998, industry started to gain important experience with the ET instru-
ment. But how about the environmental NGOs (ENGOs), then? In the immedi-
ate post-Kyoto phase they were mainly concerned with the possibility of a Rus-
sian sale of “hot air” and how polluters could “buy themselves out” instead of
dealing effectively with their own emissions.46 It seems like the ENGOs’ more
positive stance towards ET did not become evident before 1999/2000.47

In summary, the perspective of an early, largely hidden emissions trading
“pregnancy period” within the EU seems to have relevance. This section has
identiªed which push and pull factors most likely ameliorated the initial prob-
lems surrounding internal EU emissions trading. As a central push factor, the
lack of progress in the adoption of a carbon tax and other effective common EU
climate policy instruments placed an untried instrument such as emissions trad-
ing in a new perspective. Other forces pulling in the same direction included
the available permitting approach already being established through the IPPC
system; the possibility of balancing the negative price incentives for energy
efªciency brought about by energy liberalization; and the positive attitudes to
trading and emerging experiences among central industrial actors. However, al-
though the EU institutional setting may have been more prepared for emissions
trading than one might have expected, there was a clear need for strong entre-
preneurial leadership and smooth institutional collaboration to develop a full-
ºedged EU policy.

43. Ibid., 97.
44. This needs to be further veriªed by interviews with centrally placed Commission ofªcials. How-
ever, due to the high decision-making speed described in this article, these ofªcials were un-
available for interviews during the author’s visit to Brussels in May 2004.

45. BP 2004; and Skjærseth and Skodvin 2003, 55.
46. See Chasek 1998; and Zapfel and Vainio 2002, 6.
47. For instance the Climate Network Europe’s ET position paper published in 2000 had a sobering
tone, cf. “Emissions trading is a useful potential part of a European Climate Change Pro-
gramme, but not the most important. As the “sexiest” item on the agenda, it should not be al-
lowed to divert attention away from vital common and coordinated policies and measures
(CCPMs)” (Climate Network Europe 2000, 1).

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Jørgen Wettestad

• 11

2.2 The Commission as a Proªcient Entrepreneur, Bolstering the EU’s
Problem-Solving Capacity?

The process overview in section one indicates that the 2003 outcome bore a
striking resemblance to the Commission’s 2001 proposal. If we study this pro-
cess more closely, could it be that the Commission acted as a strong, independ-
ent entrepreneurial actor pushing the process along and speeding up the preg-
nancy?48 In fact, certain characteristics of the emissions trading issue, i.e. its high
uncertainty and complexity, may have provided the basis for the Commission to
exert particularly strong “instrumental” leadership.49 This would also ªt with
Andrew Moravcsik’s claim that the Commission’s entrepreneurial role is most
prominent when there is domestic uncertainty and disagreement—implying
that the Member States’ positions in these cases tend to be less ªxed or strong
and the ªeld more open for supranational entrepreneurs.50 An alternative inter-
pretation of the striking resemblance between the 2003 outcome and the 2001
proposal could be that the Commission was very sensitive to the preferences of
the Member States in putting together the 2001 proposal, and was given a good
deal of room for maneuver in the subsequent process by the Council and the
Parliament. These perspectives are not totally contradictory though; they could
very well to some extent be pursued in combination.

Let us go back to the beginning of the process. Who exactly came up with
the EU emissions trading idea? Even if the Commission is the formal EU
agenda-setter,51 EU (environmental) policy is often seen as largely shaped and
initiated by the domestic policy of one or more dominant EU states or green
frontrunners who attempt to level the European regulatory playing ªeld and in-
crease the institutional match between domestic policy design/ambitions and
EU policy.52 When the Commission started talking about the necessity of EU ET

48. The paradigm underlying such a perspective would be the multi-level governance (MLG) para-
digm, advanced for instance in Marks, Hooghe and Blank 1996; and Marks and Hooghe 2001.
As stated by Marks and Hooghe 2001, 3, “according to the multi-level governance model . . . su-
pranational institutions—above all, the European Parliament, the European Commission, and
the European Court—have independent inºuence in policy-making that cannot be derived from
their role as agents of national executives” (my italics).

49. According to Arild Underdal (1994, 187, 188), “While coercion basically comes down to im-
posing one actor’s preferences on some other(s) or preventing others from doing so to other ac-
tors, instrumental leadership is essentially a matter of ªnding means to achieve common ends
. . .To the extent that negotiations involve searching, learning, and innovation, there is . . . scope
for instrumental leadership.”

50. More speciªcally, Moravcsik (1999, 811) hypothesizes that the conditions for a supranational
entrepreneur such as the Commission to wield effective inºuence (i.e. privileged access to infor-
mation and/or high transactions costs) are exceedingly rare in the EU: “They arise only where
particular domestic, not international, coordination problems exist—such as the mobilization
of bureaucracies and multinational business around the Single European Act in the mid-
1980s.”

51. As summed up by Marks and Hooghe 2001, 12, “The European Commission alone has the for-
mal powers to initiate and draft legislation, which includes the right to amend and withdraw its
proposal at any stage in the process, and it is the think tank for new policies (Article 221 TEC,
ex-155).”

52. See Andersen and Liefferink 1997.

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12 • The Making of the 2003 EU Emissions Trading Directive

in June 1998, was it against a backdrop of domestic ET plans in central EU
Member States such as Germany, France or the UK? With regard to the two for-
mer, the case is simple and clear; both Germany and France were ET skeptics at
that point in time.53

But what about the UK, which has been pictured as something of an ET
domestic frontrunner? It is clear that the ET idea was being ºoated and dis-
cussed. However, a consultation paper on the role of economic instruments in
meeting UK climate targets, chaired by Sir Colin Marshall, concluded that a tax
would be easier to administer than an ET system.54 Hence, no clear decisions
had been made with regard to an UK ET system at this stage. So what about
other EU ET frontrunner states, such as Denmark? Legislation was drafted and
discussed in May 1998. But the Bill on CO2 quotas for electricity production was
not adopted until the end of May 1999.55

Interviews with various participants in and observers of the EU process in-
dicate that central Commission ofªcials within the DG Environment (DG ENV)
personally pushed the trading option.56 Jos Delbeke had sorely experienced the
carbon tax failure and was skeptical to voluntary agreements. Peter Zapfel
joined the Commission in January 1998 and had studied ET in the US. More-
over, the Commission had gotten the message back both from legal advisors
and EU working groups that an additional instrument was needed in order to
exert control over the further EU climate policy process and pull the EU to-
gether. ET was identiªed as the instrument that could do that.

Let us then take a step forward in time. A natural stop along the line is the
Commission’s 2001 proposal. The proposed emissions trading design was out-
lined in section one. But what inspired and shaped the Commission’s proposed
ET design of October 2001? At this point in time, the trading systems of several
Member states were either up and running or in the pipeline. As noted, the Dan-
ish system started in May 1999, and the UK system took shape during 2001,
with a formal start in March 2002.57 Moreover, as noted in section 2.2., several
industry systems were also up and running. According to Zapfel and Vainio,58
“the implementation of the BP pilot (scheme) and the extension to cover all the
150 business units world-wide as of January 2000 constituted increasingly pow-
erful drivers in the discussion.”

In addition, following the launch of the ET Green Paper in March 2000, a
ªrst round of extensive consultation had been carried out. ENDS Daily reported
a “mixed response,” with clashing EU governments and business actors.59 Com-
ments received by the Commission ran to over 700 pages. Governments gener-

53. See Jordan et al. 2003, 207.
54. ENDS 1998, 39.
55. Mortensen 2003. According to Zapfel and Vainio (2002, 9), the Danish system was hardly no-

ticed outside particularly interested and informed circles.

56. Interviews in Brussels February 2002 and May 2004. See complete list at the end of the article.
57. ENDS Daily 2002.
58. Zapfel and Vainio 2002, 9.
59. ENDS Daily 2001a.

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Jørgen Wettestad

• 13

ally emphasized administrative simplicity and practicability, but were split on
the issue of allocation by grandfathering or auctioning.60 Still, the Commis-
sion’s overall approach was met with general approval.61 ET was also a central
discussion item in the multi-stakeholder European Climate Change Pro-
gramme. Moreover, further consultation meetings were held in September
2001.62 All in all, lessons were being learned and positions formed on which the
Commission was able to draw in the preparations for the 2001 proposal.

But what about the internal coherence of the Commission itself? It has
been maintained that the most difªcult part of EU decision-making is getting a
proposal adopted within the Commission.63 Was the Commission unusually
united in this case, adopting a strongly entrepreneurial role in the decision-
making process? Unity is, of course, a relative thing and total agreement is
hardly to be expected in a body consisting of 23 members (i.e. Directorates). In
this case, there was clearly some internal disagreement. For instance, in June
2001, ENDS Daily reported that Environment Commissioner Wallström had
shelved a plan for a trading scheme in time for the climate conference due to
take place in Bonn the following month. Industry pressure had allegedly led
several commissioners, including DG Enterprise Commissioner Erkki Likkanen
and DG Competition Commissioner Mario Monti, to block the proposals. In-
dustry particularly opposed the mandatory character of the scheme suggested by
DG ENV. The Energy and Transport Directorate was also skeptical.64

However, after that, the impression is one of a declining disagreement
within the Commission, related to all of the push and pull factors discussed in
the previous section, and the US pull-out of the global process (see next sec-
tion).65 As a particularly important development, DG Competition changed its
position, fearing opt-outs and increased ºexibility. According to Brussels insid-
ers, DG Competition’s support to DG ENV served to isolate DG Enterprise and
was hence very instrumental.66 Moreover, in contrast to command-and-control
approaches and even the taxation instrument, the very nature of emissions trad-
ing as a market-based policy instrument and its potential for reconciling EU
economic and environmental goals probably made it comparatively easy for the
DG ENV to “sell” the ET idea to other DGs.

How controversial was the Commission’s proposal in other parts of the
EU system? If other bodies and actors basically agreed with the Commission, it
may explain the powerful stance of the Commission and the speeded-up deci-

60. According to ENDS Daily (2001a), Austria, Denmark, Finland and Sweden all came out in favor

of auctioning as the main allocation mechanism.

61. Ibid.
62. European Commission 2001, 2.
63. Interview with Frazer Goodwin, former DG ENV, now Transport and Environment, June 2003.
64. ENDS Daily 2001b. Interviews in Brussels February 2002 and May 2004.
65. This view was supported in the string of interviews with various participants in the EU policy-
making process conducted in May 2004. However, as noted in footnote 44, central Commis-
sion ofªcials were unavailable at this point in time.

66. Interviews in Brussels, May 2004.

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14 • The Making of the 2003 EU Emissions Trading Directive

sion-making process. With regard to the Council and the Member States, it can
be noted that the Environment Council discussed the matter in October 2001
(right after the Commission’s proposal had been put forward) and concluded
that “the Council is appreciative to the Commission for presenting a proposal
for a framework Directive for an EU greenhouse gas emissions trading
scheme.”67 This indicated a fundamentally friendly attitude to this initiative,
probably also related to the lack of realistic alternatives. Moreover, the Commis-
sion’s proposal postponed most of the difªcult and important discussion about
the level of the national caps to the follow-up process, instead managing to fo-
cus the discussion in the EU bodies on the arguably less important issue of allo-
cation method. This may have been one of several, clever entrepreneurial moves
made by the Commission.

But several Member States, among them such heavy-weights as Germany
and the UK, were critical of aspects of the Commission’s design. For instance,
when the Environment Ministers discussed the trading scheme further in
December 2001, the UK opposed it being mandatory from the outset, and re-
ceived support from Germany, among others, who was worried that compulsory
participation would clash with its national energy efªciency agreements
with industry.68 According to the Belgian environment minister, opposition to
the scheme being mandatory from the start was sufªcient to form a blocking
minority.69

Turning to the European Parliament, the overall situation there was simi-
lar to the Council’s: a positive general attitude, though with a number of more
speciªc concerns and disagreements with the Commission’s proposal. As may
be recalled, although the EP tabled over 80 amendments in the First Reading
process, the impression is that only a minority was taken on board. In the light
of the EP’s generally enhanced position in the EU system and its successful
stance in other major EU processes, how come the EP was only moderately suc-
cessful in this particular case?70 It could have had something to do with the
complex nature of the emissions trading issue, with a number of sub-issues and
design dimensions.71 It seems that the Parliament failed to ªnd focal points in the
ET process until the very last phase. For long, the Members of Parliament had
numerous suggestions, but with limited coherence and direction.

67. Press release, 2378th Environment Council meeting, Luxembourg, 29 October 2001, available

at http://ue.eu.int/Newsroom/ (accessed 28 February 2002).

68. ENDS Report 2001, 49. According to Haigh (2004, 3), also Finland, Greece, Italy and Luxemburg

were opposed to a mandatory scheme.

69. ENDS Daily, 2001c.
70. According to Tsebelis and Barrett (2001, 372), “the empowering of the Parliament as a legislator
is a key institutional development in the modern history of European integration.” They also
maintain that “by and large, the institutional modiªcations introduced by the SEA and the
Maastricht and Amsterdam Treaties had the intended effect of reducing the Commission’s role
and increasing the Parliament’s” (p. 387). For a wider view, see for instance Nugent 1999, chap-
ter 9.

71. According to Wurzel (2002, 71), the Parliament generally suffers from a “technological deªcit.”

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Jørgen Wettestad

• 15

Finally, if we turn to the concluding phase of the process in the spring of
2003, although some Member State opposition lingered on, it was not united.
For instance, the UK’s concerns about the system were quite different from the
German ones, and at this stage of the game, the heat was clearly being turned
up. The EU’s reputation as a capable policy-maker was increasingly at stake. As
noted by the ENDS Report, “MEPs, the European Commission and Member
States are all keen to thrash out a compromise—not least because any formal
amendments from the Parliament would trigger the conciliation procedure,
jeopardizing the planned 2005 start for trading.”72 It can be assumed that this
contributed additional political weight to the Commission’s suggested design
and the Council’s largely similar Common Position.

To close then, there are good reasons to believe that the Commission’s en-
trepreneurial role is most prominent in cases of considerable complexity,
hemmed in by domestic uncertainties and disagreements. How do the various
bits and pieces of information collated here ªt in with this claim? The fact that
very few governments had clear ET plans and positions in 1998 clearly ªts the
hypothesis. And with regard to Germany, splits were emerging between the gov-
ernmental position (rather positive) and the industrial position (quite negative)
towards the end of 2002.73 That said, there were supranational factors to the
process which could further explain the Commission’s strong entrepreneurial
position and the EU’s high problem-solving capacity in this case. For instance,
even though it was not complete, there was a high level of internal coherence in
the Commission. There was also a relative weakness of the European Parliament
as an “argumentative” EU actor, related partly to the complex character of the
trading issue and a lack of clear-cut focal points for lobbying—and, over time,
the increasing need to have an ET scheme quickly adopted. Finally, there was
the overall positive attitude of the Council.74 All of these factors served to en-
hance the position of the Commission as a strong entrepreneur, speeding up the
decision-making process. But why was it so important to have an EU trading
scheme quickly adopted?

2.3 External Impulses and Windows of Opportunity

With regard to external inºuences on the development of the EU trading
scheme, there are at least two different perspectives with successive analytical
relevance: there is a learning perspective whose relevance mainly plays out in

72. ENDS Report 2003, 18. As noted in section 2.3, the 2005 start is also related to the need to show

“demonstrable progress” by 2005 put forward in Article 3.2. in the Kyoto Protocol.

73. For example, Reuters/Planetark 2002.
74. Hence, as emphasized by a reviewer of this manuscript, it was in the interests of a majority
of the Member States to have an ET system established quickly. However, in order to turn this
collaborative potential into practice, the Commission’s entrepreneurial role was in my view
essential.

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16 • The Making of the 2003 EU Emissions Trading Directive

the period before 2001, and a “system shock”/window of opportunity perspec-
tive of relevance to the post-2001 events.

Turning ªrst to the transnational learning perspective, the policy learning
which took place during the preparations for and negotiations on the Kyoto
Protocol in 1996/97 should not be forgotten.75 Although the EU ofªcial view
on ET was relatively unforthcoming in this phase, further learning as to the pros
and cons of this instrument inevitably took place. Moreover, it was a fact that ET
was included in the Kyoto Protocol and in some way the EU just had to “get on
with it” too. This was also seen as a precondition for moving towards ratiªca-
tion of the Protocol in the US.76

Commentators have pointed out in addition that the US experience of sul-
phur dioxide (SO2) and nitrogen oxides (NOx) emissions trading proved an im-
portant factor in the EU’s policy about-turn around 1998. It involved both an
active involvement of US experts in discussions with the EU Commission, who
hired economists with detailed knowledge of US emissions trading.77 No doubt
this gave the Commission a head start and a power boost with regard to the
trading issue within the EU system. It is also likely that the US SO2 trading expe-
riences facilitated the Commission’s task of coming up with a complete trading
design proposal in the fall of 2001.

It is interesting to note how US inºuence on European actors in this early
phase operated along various pathways. According to Zapfel and Vainio,78 “a
major factor in the [BP’s] decision to embark on this [i.e. the ET] route was the
lobbying of BP by the US environmental pressure group Environmental De-
fense, the most active supporter of emissions trading on the environmental side
in the United States for many years.”

However, in the wake of the US March 2001 decision to pull out of the
Kyoto Protocol, the position as the global emissions trading pilot and climate
policy entrepreneur suddenly became vacant. With such a big potential buyer of
global allowances out of the game, the prospective prices for allowances looked
far more promising from an EU perspective.79 The challenge and opportunity
were taken on by the EU through a two-pronged strategy,80 the one prong being
its diplomatic bid to try to save the Kyoto Protocol. According to Hovi et al.,81 “it

75. Regarding the transnational learning perspective, see for example, Haas 1990; Young and

Osherenko 1993; and Hasenclever et al. 1997.

76. Zapfel and Vainio 2002, 6.
77. See Zapfel and Vainio 2002; and Christiansen and Wettestad 2003, 6–7. This learning process
may have increased the information asymmetries within the EU about the emissions trading in-
strument and hence empowered the Commission. As noted by Marks and Hooghe (2001, 11),
principal (i.e. national) control over an agent (such as the Commission) may be weakened if
the agent has access to information or skills that are not available to the principal.

78. Zapfel and Vainio 2002, 8.
79. As noted by IEA (2002, 15), “Other countries, particularly EU members and Japan, may now
buy the credits cheaply and so fulªll their Kyoto commitments at a far lower price than other-
wise.”

80. Hovi et al. 2003, 18.
81. Hovi et al. 2003, 19.

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Jørgen Wettestad

• 17

seems fair to conclude that had it not been for the EU, the Kyoto Protocol might
have been dead.” In part it took the form of setting a good example by develop-
ing EU internal climate policy. Ratiªcation of the Kyoto Protocol is part of this,
but it can be argued that the successful establishment of a pilot GHG ET scheme
soon became the potential jewel in the crown for EU climate policy. It should
also be recalled that Article 3.2. in the Kyoto Protocol calls for “demonstrable
progress” by 2005. But to claim the jewel for its crown by 2005, the Commis-
sion would have to ensure the EU process was up and running as soon and as ef-
fectively as possible.

Moreover, as has been pointed out by Cass,82 the very framing of the trad-
ing issue started to change within the EU; from ET being an illegitimate Ameri-
can attempt to shirk domestic responsibilities to a legitimate strategy to salvage
the Kyoto Protocol without American participation. This was a crucial contribu-
tion to winning both skeptical ENGOs, Commission Directorates, Member
States and Members of the European Parliament over in this matter.83 As noted
by Brussels insiders, “the huge luck the Commission had was Bush’s with-
drawal . . . It united the EU in an extraordinary way.”84

3. Winding Up: Multi-Level Governance and its Requirements

Let us ªrst sum up some main ªndings. In order to shed some explanatory light
on the EU’s remarkably rapid ET policy-making process, all three perspectives
scrutinized in the previous sections seem to contribute important elements.
First, we identiªed several “push” and “pull” factors in EU environmental and
climate policy developments prior to the 1998 turning-point, which indicate
that the emissions trading issue was more mature than originally thought. As a
main pushing factor, there was the EU’s post-Kyoto climate policy hangover.
The projections for Member States’ emissions were worrying, while no effective
common climate policies had been adopted. The carbon/energy tax was still
blocked and programs for energy efªciency and renewables were timid. With re-
gard to pull factors, the 1996 IPPC Directive offered an already available permit-
ting approach of potential use also in the trading context, and the possibility to
counter the negative price incentives for energy efªciency brought about by en-
ergy liberalization and the positive attitudes to and experience with emissions
trading among central industrial actors may have pulled EU decision-makers to-
wards the trading option. All these factors meant that the EU system was more
ripe and ready for emissions trading in 1998 than immediately apparent.

Second, the Commission played an “extra strong” entrepreneurial role
throughout the process, which of course speeded up the process. The Commis-
sion got a head start as only a few Member States had seriously discussed do-
mestic ET systems in the ªrst years of the EU ET process, and acquired trading

82. Cass 2004.
83. Interviews in Brussels, May 2004.
84. Ibid.

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18 • The Making of the 2003 EU Emissions Trading Directive

expertise from American experts. Moreover, related to both the internal push
and pull factors and global developments, the Commission developed into a
quite uniªed body. The Commission also made clever entrepreneurial moves,
such as subtracting the potentially totally damaging issue of the level of na-
tional emission caps from the decision-making process early on. Within the
Council, the same push and pull factors probably contrived to bring about a
generally positive attitude to the ET initiative and the Commission’s proposed
design of 2001. Although central Member States such as Germany and the UK
had objections to the Commission’s proposal, their objections had a quite dif-
ferent domestic base and did not represent a uniªed opposition. The European
Parliament, an increasingly powerful co-legislator in the EU system, was also
positive to the trading instrument. Nor did it manage to ªnd simple and power-
ful focal points for lobbying in the complex ET “jungle.”

Third, in the initial phase of the process, Kyoto negotiation experiences
and US trading experiences and experts provided lessons on emissions trading
within the EU system. When the US pulled out of the Kyoto process in March
2001, it left the EU as the main global climate change player, allowing the EU to
up the ante in its ET process. This “global heat” strengthened the Commission’s
hand further and, more speciªcally, no doubt led to the swiftly achieved ªnal
agreement between the Parliament and the Council in June 2003. The combina-
tion of a strong Commission and fundamentally positive other EU bodies gave
the EU as a whole a high problem-solving capacity in this case.

What lessons can be drawn from the EU’s high policy-making tempo in
this context, and can it jeopardize the future success and effectiveness of the sys-
tem? Could high decision-making speeds lead to an inadequately developed
system? Could for instance central stakeholders and target groups not have been
adequately consulted and/or not given adequate time to get acquainted with the
trading instrument, and central externalities for existing policies and affected
sectors not taken into consideration? This raises the more general question of
what is really a “normal” and “adequate” political “pregnancy” for a complex,
multi-level body such as the EU? The answer is not clear cut. We may assume
that in order to consult adequately with central stakeholders and target groups
and allow sufªcient learning, a certain minimum timeframe is necessary. The
intrinsic complexity of the issue area in question and existing knowledge of the
workings of policy instrument to be adopted are probably central conditioning
factors. The more complex and multi-level the issue and the less experience
there is of the policy instrument, the longer the process will have to be to
achieve adequate output. So far, it is clear that several rounds of consultation
were carried out and several mechanisms of stakeholder involvement utilized.
The relationship with other environmental and climate policies has been
discussed in several documents. However, a nagging question remains: will it
be enough, given the high complexity and novelty of the emissions trading
instrument?

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Jørgen Wettestad

• 19

Recent developments certainly conªrm the impression of an almost break-
neck decision-making speed and bureaucratic capacity pushed to the limits. For
instance, only the UK complied with the 31 December 2003 deadline for formal
transposition of the ET Directive, the 14 others failed to make this deadline.85
The process of producing initial national allocation plans (NAPs) had a formal
deadline of 31 March 2004. This process is very important in ºeshing out the
general design principles agreed to in the ET Directive. Not surprisingly, then,
this crucial process has also experienced delays. For instance, by July 2004, ªve
countries had issued draft NAPs but not submitted them to the EU, and three
countries had not even published a plan.86 By early October, only eight NAPs
have been ªnally approved by the Commission.87 The submitted NAPs have
been criticized for being too generous in terms of handing out allowances and
hence the necessary scarcity required for the system to work properly could be
in danger. Moreover, a company survey carried out by consulting ªrm Ernst &
Young in mid-2004 found many companies within the European Union unpre-
pared for trading and also found high skepticism with regard to a timely start
and well-functioning system.88

So the need for a proªcient policy entrepreneur may be more urgent than
ever, as the stakes really are high. The successful start and development of an EU
emissions trading system could be something of a catalytic event for global
progress in the issue area of climate change. It is quite possible that the EU
system could form the blueprint for the future development of a global trading
system.

Relevant Interviews

• Jorge Moreira Da Silva, European Parliament, 11 February 2002.
• Rob Bradley, Climate Action Network (CAN), 11 February 2002; and

26 May 2004.

• Christian Egenhofer, Centre for European Policy Studies (CEPS), 12 Feb-

ruary 2002.

• Henning Arp, European Commission, DG Environment, 12 February

2002.

• Peter Zapfel, European Commission, DG Environment, 13 February

2002.xxxx

• Frazer Goodwin, Transport & Environment, 18 June 2003.
• Per Stiansen, Norwegian Ministry of the Environment, 16 January 2004.

85. Bloomberg 2004.
86. These ªve were Belgium, Czech Republic, France, Italy and Spain. Member States that had not

published a draft were Greece, Hungary and Poland. Point Carbon 2004a.

87. These eight are Austria, Denmark, Germany, the Netherlands, Ireland, Slovenia, Sweden, and

the UK. Point Carbon 2004b.

88. Ernst & Young 2004.

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20 • The Making of the 2003 EU Emissions Trading Directive

• Trygve Hallingstad, Norwegian Ministry of the Environment (Brussels rep-

resentative), 26 May 2004.

• Ulf Bjornholm-Ottosen, Swedish Delegation to the EU, 16 May 2004.
• Terhi Lehtonen, European Parliament, 27 May 2004.
• Sabina Magnano, European Parliament, 27 May 2004.
• Mike Wriglesworth, International Emissions Trading Association (IETA),

27 May 2004.

• Frank Brannvoll/Jenny Schulz, Storaenso, 27 May 2004.
• John Scowcroft, Eurelectric, 28 May 2004.
• Håvard Vaggen Malvik/Kåre Rudsar, European Commission, DG for

Energy and Transport, 28 May 2004.

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• 21

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