A case study of policy interactions within the Netherlands NOx emission trading scheme
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The purpose of this study is to investigate the impact of the co-existence of overarching ‘command and control’ regulatory policies on the cost-effectiveness of subordinate Emission Trading Systems (ETS). The Netherlands introduced an ETS in 2005 as a cost-effective measure to decrease the emission of Nitrogen Oxides (NOx) in stationary sources. The ETS was repealed after eight years, however, because of the limited effectiveness of the scheme. The influence of the Integrated Pollution Prevention and Control Directive (IPPC), a regulatory standard adopted to achieve industrial emission objectives at the European level, was anticipated to be a cause of this limited effectiveness. The Dutch NOx ETS was, therefore, chosen as the focus for this study as it allows key questions to be addressed about the influence of vertical interactions between overarching climate regulations and Emission Trading Schemes on the cost-effectiveness of the trading scheme. The influence on the cost-effectiveness of the ETS was assessed by calculating the specific costs of the actual implemented abatement techniques in terms of EUR/kg NOx abated and comparing these to the remaining least-cost abatement potential. Data from the emission reports of all participants of the NOx ETS, as provided by the NEa, was used to assess the abatement techniques. The abatement techniques not found in the emission reports were found by means of a company survey and cost functions in the literature were used to assess the specific cost of each measure. The results, explaining 17.5 ktons of the total 20.2 ktons NOx NOx abatement achieved in 2012, showed that 16 ktons abated NOx emissions were attained at relatively low-cost. Since virtually all abatement originated from companies subject to the IPPC, it is clear that the directive undermined the functioning of the emission market. Because of the interaction between the Directive and the NOx ETS, 1 kton of abatement was attained at significantly higher cost than remaining least-cost abatement potential and thus caused estimated additional abatement costs of 10 million EUR per year. Compared to the regulatory cost of the ETS, however, the additional abatement costs were shown to be relatively limited. The IPPC Directive succeeded in enforcing a large proportion of abatement at relatively low cost, thereby reducing the gain in cost-effectiveness achievable by an ETS with no interactions. The reason for this was found to be due to the sensitivity of the IPPC emission limits to the cost-effectiveness of abatement measures and the relative homogeneity of the cost of NOx abatement techniques.