Who’ll Stop the Rain? The Allocation of Emission Allowances Free of Charge: Economics, Environmental Policy, Political Choices and WTO Subsidy Law

This article investigates the environmental and economic impact of the free allocation of emissions allowances in Emissions Trading Schemes (ETSs) as well as its compatibility with trade law. Free allocation can facilitate the industry’s gradual adjustment to an ETS and hence boost its acceptability. At the same time, however, the article shows that the economic and environmental benefits of free allocation are debatable. Moreover, the practice of free allocation possibly contravenes WTO law. The conclusion that free allowances may constitute an objectionable subsidy under WTO subsidy disciplines raises questions of law reform. Should the ETS be reformed to fit conventional trade imperatives, or should trade law be rethought so as to be responsive to contemporary environmental protection strategies? The article argues that, considering the questionable benefits of free allocation, any adjust- ment to trade law should be narrow and temporary.