Carbon Leakage: Options for the EU. CEPS Special Report, March 2014

This CEPS Special Report builds on the first deliverable of the project entitled “Carbon leakage: Options for the EU”. It identifies carbon costs, and the ability to pass through carbon costs, as the main risk factors that could lead from asymmetrical carbon policies to carbon leakage. It also outlines and evaluates, based on criteria discussed in the paper, options for detecting and mitigating the risk of carbon leakage in three jurisdictions, with special attention to the EU ETS (Emissions Trading Scheme). Based on the analysis of approaches currently used in a number of existing carbon pricing systems, it identifies the balance between the number of sectors identified as being at risk, and the amount of compensation provided as a risk mitigation measure, as the critical element in providing an optimum approach to address carbon leakage risks. It also identifies a risk-based approach to identifying sectors at risk as allowing for a better reflection of reality in a counterfactual argument. Finally, the paper concludes that while, with some exceptions, there has been limited carbon leakage until now, the past may not be a good reflection of the future and that measures need to be put in place for the post-2020 period. While examining a number of approaches, it identifies free allocation as the most likely way forward for mitigating the risk of carbon leakage. While other approaches may provide interesting options, they also present challenges for implementation, from a market functioning, to international trade and relations, points of view. A number of challenges will need to be addressed in the post-2020 period, with many of them part of the EU ETS structural reform package. Some of these challenges include, among others, the need to recognise, and provide for individual sectoral characteristics, as well as for changes in production patterns, due to economic cycles, and other factors. Finally, the paper emphasises the need for an open dialogue regarding the post-2020 provisions for carbon leakage as no overall Energy and Climate Package is likely to be agreed on until this matter is addressed.

Freedom of religion in Turkey - The Alevi issue. EPC Commentary, 24 January 2014

Freedom of religion is a fundamental right that must be protected and respected by states. While Turkey has taken important steps in advancing religious freedoms over the last decade, a number of challenges remain. Turkey’s Alevi Community continues to face serious problems in terms of being officially recognised by the state and in practicing their religion. While Turkey is officially a secular country, Sunni Islam is the unofficial state religion. Despite Ankara being a signatory of several international conventions and treaties that guarantee fundamental freedoms for all, key fundamental rights of Alevis remain ignored by the state. Last September, hopes were raised that a new “democratisation package” would include steps to further their freedoms but it failed to do so, with the government announcing that a ‘special’ Alevi reform package would be unveiled by the end of 2013. This did not happen.

Brexit or not? Time for the EU to move. EPC Commentary, 8 September 2014

The deteriorating relationship between the United Kingdom (UK) and the rest of the EU, including the prospect of a referendum on EU membership, would have dominated the Union’s agenda had it not been for the economic/financial crisis, followed by the external crisis which we are now facing in the East. Precisely because of these crises, it is now time for the incoming European Commission to take the bull by the horns and ensure that the EU can move on from a potential referendum and its possible outcomes. The June European Council noted that “the UK raised some concerns related to the future development of the EU. These concerns will need to be addressed. In this context, the European Council noted that the concept of ever closer union allows for different paths of integration for different countries, allowing those that want to deepen integration to move ahead, while respecting the wish of those who do not want to deepen any further.” While the EU has, arguably, successfully developed at different speeds for decades, to address the UK’s (fundamental) concerns, it is now time to work out whether and how the UK can be accommodated, and what this would mean in practice. UK membership is desirable but not at any price, so the aim should be to keep the UK in, while also ensuring that the principles on which the EU is built are protected. There will need to be a modus operandi which enables the EU and in particular, the Eurozone, to continue to make progress in addressing the shortcomings of European integration and European Monetary Union (EMU) in particular, while at the same time offering a reform package that can satisfy the UK. This does not necessarily mean that all EMU reforms have to be within the EU framework: additional intergovernmental arrangements could also be a possibility. However, this could add to the complexity and inefficiency of the system, as well as sidelining the supranational element of EU governance which will be needed to make EMU function.

Britain’s Political Earthquake: What aftershocks for Europe and the UK? CEPS Commentary, 11 May 2015

In the wake of last week’s elections in Britain, Michael Emerson examines in this CEPS Commentary the implications of the astonishing results for the EU and the UK and outlines a possible reform package that David Cameron might present to the EU institutions and other member states to fulfil his pledge to achieve a “reformed EU”. He also urges the Prime Minister to consider adding a constructive component to his reform package, namely positioning the UK to act once again as a leading proponent of a more effective European foreign, security and defence policy.

Ukraine: Can meaningful reform come out of conflict? Bruegel Policy Contribution 2014/08, August 2014

Apart from threats to its national security and territorial integrity, Ukraine faces serious economic challenges. These result from the slow pace of economic and institutional reform in the previous two decades, the populist policies of the Yanukovych era and the consequences of the conflict with Russia. The new Ukrainian authorities have made pro-reform declarations, but these do not seem to be supported sufficiently by concrete policy measures, especially in the critical areas of fiscal, balance-of-payment and structural adjustment. Also, the international financial aid package granted to Ukraine has not been accompanied by sufficiently strong policy conditionality. Ukraine urgently needs a complex programme of far-reaching economic and institutional reform, which will include both short-term fiscal and macroeconomic adjustment measures and medium- to long-term structural and institutional changes. Energy subsidies and the low retirement age are the two critical policy areas that require adjustment to avoid sovereign default and a balance-of-payments crisis.

European Neighbourhood Policy Package - Conclusions for the Eastern Partners. OSW Commentary No. 78, 2012-05-25

In 2011 the European Union began a process aimed at reforming its policy on the Eastern and Southern Neighbourhood. The change in circumstances in neighbouring countries following the Arab Spring, along with the lack of significant progress regarding Eastern Europe’s integration with the EU, formed the main driving force behind this process. The prime objective of the changes to the European Neighbourhood Policy (ENP) was the need to introduce new incentives for partner countries to modernise and integrate more closely with the EU Another aim was to increase the flexibility of EU instruments (by adapting them to the specific context of each partner state). One year later, on 15 May 2012, the European Commission and the EU High Representative for Foreign Affairs and Security Policy published the European Neighbourhood Policy Package which reported on the progress made in the implementation of the ENP over the preceding year and set out the aims and Action Plans for 20131. An analysis of the outcomes of changes made to the EU policy towards Eastern Europe and the South Caucasus suggests that the aim of the revision was aimed more at addressing the changing political landscape in the region rather than at the implementation of a substantial reform of the neighbourhood policy. The ENP is largely based on bureaucratic procedures (the negotiation of bilateral agreements, the implementation of support programmes). These have only a limited capacity to bring about lasting change in the region, as has been exemplified by the deterioration of democratic standards in a number of countries; this was highlighted in EU’s own reports. This problem is particularly clear in the case of Ukraine; until recently it was seen as the leader of European integration but is now raising much concern due to a deterioration in the state of democracy there. EU instruments have a limited influence on the situation in Eastern Partnership countries and the region’s significance on the EU’s agenda is falling (the priority is now given to counteracting the economic crisis, and prominence in the neighbourhood policy has been given to the Southern Mediterranean). In response to this EU policy on Eastern Europe will focus to a larger extent on technical and sectoral cooperation.

The Economics of EU Railway Reform. Bruges European Economic Policy (BEEP) Briefing 8/2004

The EU began railway reform in earnest around the turn of the century. Two ‘railway packages’ have meanwhile been adopted amounting to a series of directives and a third package has been proposed. A range of complementary initiatives has been undertaken or is underway. This BEEP Briefing inspects the main economic aspects of EU rail reform. After highlighting the dramatic loss of market share of rail since the 1960s, the case for reform is argued to rest on three arguments: the need for greater competitiveness of rail, promoting the (market driven) diversion of road haulage to rail as a step towards sustainable mobility in Europe, and an end to the disproportional claims on public budgets of Member States. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are several (natural monopoly, economies of density, safety and asymmetries of information), exacerbated by no less than 7 technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the growth of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, a combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs might be superior in terms of competition, market growth and regulatory oversight. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient. The arguments to introduce competition, notably in freight, are valuable and many e.g. optimal cross-border services, quality differentiation as well as general quality improvement, larger scale for cost recovery and a decrease of rent seeking. Nevertheless, it is not correct to argue for the introduction of competition in rail tout court. It depends on the size of the market and on removing a host of barriers; it requires careful PSO definition and costing; also, coordination failures ought to be pre-empted. On the other hand, reform and competition cannot and should not be assessed in a static perspective. Conduct and cost structures will change with reform. Infrastructure and investment in technology are known to generate enormous potential for cost savings, especially when coupled with the EU interoperability programme. All this dynamism may well help to induce entry and further enlarge the (net) welfare gains from EU railway reform. The paper ends with a few pointers for the way forward in EU rail reform.

Scanning the Options for a Structural Reform of the EU Emissions Trading System. CEPS Special Report 107, 19 May 2015

This paper provides a comprehensive overview and analysis of different options to reform the EU Emissions Trading System (ETS). The options discussed include changes to address the rigidity of supply on the auctioning side, as well as reforms to add flexibility to free allocation. Additionally, other options that may enhance the functionality of the EU ETS are covered, drawing on examples and practices in other carbon-pricing mechanisms around the world. It is crucial to note that any reform of the EU ETS must consist of a package of options. Taken separately, the options may very well have beneficial effects, but they would also leave intact clear imperfections in the current design. Specifically where the auctioning supply mechanism and the flexibility in free allocation are concerned, we assess multiple options in each category, and present evidence for each option. Where appropriate, we suggest complementing these reform options with additional elements (presented in section 3.3). The aim of any structural reform should be to arrive at a set of options that forms a consistent and credible package. With this paper, we provide an evidence-based assessment of the various building blocks of such a reform.

Reform #1. Why Ukraine has to reform its gas sector. OSW COMMENTARY NUMBER 181/01.09.2015

In April 2015, the Ukrainian parliament passed a long-awaited law on the gas sector which paves the way for the extremely difficult process of reforming and de-monopolising the Ukrainian gas sector. The law will come into force on 1 October 2015 and involves the break-up of the state-owned company Naftogaz, the current monopolist, and the gradual creation of a competitive gas market in line with the so-called Third Energy Package. At the same time, a threefold increase in the price of gas paid by individual customers and the public sector was introduced. The price had been subsidised for years and no previous government had ever decided to raise it.