Case study: did the Netherlands break out?
Environmental regulation in the Netherlands is an interesting case in point (for example, Woerdman et al., 2002). Various ministries, as well as the Vogtlander Committee, which was investigating emissions trading, initially pleaded in favour of credit trading by building upon existing standards for those sectors of industry that were energy-intensive and competing internationally.
The four factors mentioned above explain their position. However, a number of scientists (in particular economists) and ultimately also the Social- Economic Council, in its capacity as adviser to the Dutch government, in fact pleaded in favour of the non-incremental option of permit trading. Thanks to decreasing political transaction costs of permit trading, the balance now seems to tilt in favour of the latter.As the information on permit trading improved, the problem-solving capacity of extant environmental policy deteriorated and cultural barriers concerning ‘pollution rights’ crumbled, there was an increasing preparedness to tackle the legal impediments. The largely successful experiments with permit trading in Denmark and the UK, coupled with the will of the Europeans to display effective leadership in international climate policy after the Americans had left the Kyoto Protocol in 2001, also contributed to a lowering of the switching costs of permit trading. Moreover, the European Commission adopted a pioneering role, exerting internal pressure by preparing a directive that would enable permit trading in the EU from 2005 for installations of large industrial sectors. On an overarching European level, as against individual member state level, there was hardly any existing climate policy, let alone well-established legal instruments, to build upon. In 2003, after some amendments, the European Parliament agreed to this directive in a codecision procedure and member states now have to put it into effect.
This alsomeans that Dutch climate policy, after years of uncertainty, is en route to an institutional break-out.
Nevertheless, some companies and policy makers still try to steer the national allocation of emission rights in the direction of credit trading, by linking the height of ceilings for individual companies, within the ceiling for an industry as a whole, to the size of their production. This sort of linkage, which is advocated on fairness grounds by many (energy-intensive) companies, and even by some scientists (for example, Groenenberg and Blok, 2002), is not fully efficient. On the level of the individual firm, it is then signalled that production growth implies free emission space. Economists know, however, that there is no such thing as a ‘free lunch’. The price of the extra emission space should make clear that an expansion of carbon-intensive production can lead to destroying economic value, because it would necessitate relatively expensive, additional emission reduction measures elsewhere in the economy.
A bleaker picture must be painted for acidification policy in the Netherlands. Here, no international developments in the direction of permit trading are present and a credit trading system for NOx emissions is being prepared to make the system of strict emission standards for large combustion plants more flexible. As of yet, there are no plans to make a switch to permit trading here. The path-dependent history is illustrative. The government and the chemical industry could not agree upon a NOx emissions covenant, mainly due to scale differences between the companies in this heterogeneous sector, after which they decided to make current standards less rigid by means of credit trading. It is not likely that this ‘moving train’ will now suddenly change track to follow the destination of the more efficient and effective alternative of cap and trade, not least because of the vested interests that push hard to avoid emission ceilings. This underlines that the Netherlands has not yet escaped from an institutional lock-in in all corners of environmental regulation.