4 in Buenos Aires in 1998: ‘…the intra EC-tradingarrangements must be in conformity with the rules and modalities agreed in BuenosAires for emissions trading at an international level’.17 This expectation was sharedby the member-states. In March 1998, the Council of Ministers underlined that‘emissions trading should be subject to appropriate rules and that these rules shouldbe developed at CoP4’.18 The Commission and the member-states thus expectedthe Buenos Aires negotiations to produce the same outcome as the negotiations inMarrakech actually did three years later.CoP-4 in Buenos Aires failed to deﬁne the rules of the game for emissionstrading. It focused mainly on developing countries and did not succeed in bringingthe discussion on the rules and modalities for emissions trading much further. Thisconference was nevertheless important as it conﬁrmed the Kyoto Protocol andmaintained momentum by deciding on a follow-up processes. It was agreed to setup a work programme on the ﬂexible mechanisms as part the Buenos Aires Planof Action.19 This plan initiated new negotiations on emissions trading to be agreedby CoP-6 at The Hague, in November 2000. A list of possible topics was attached16 There is, however, anecdotal evidence of early discussions of a system of tradablepermits in Europe (Christiansen 2004, 31).17 European Commission (June 1998), COM(98)353, Commission Communicationto the Council and the Parliament. Climate change – Towards an EU Post-Kyoto Strategy(Brussels), 21.18 Council (26 March 1998), 7125/98, Subject: Community Strategy on Climate Change.Outcome of proceedings from Environment Council on 23 March 1998. Brussels.19 Earth Negotiations Bulletin (97, 1998), ‘Report of the Fourth Conference of theParties to the Framework Convention on Climate Change: 2-13 November 1998’, 12:97.
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to the decision, including not less than 32 outstanding issues on emissions trading(Grubb et al. 1999, 251). Negotiations on the emissions trading rules continued inworking groups and at CoP-5 in Bonn 1999. In line with the Buenos Aires Plan,it was intended that agreement on a range of issues should be reached at CoP-6 atThe Hague. After two weeks of negotiations, however, the Parties failed to reachconsensus on several key issues. One of these issues was modalities and rules foremissions trading.20The failure to develop rules for an international emissions trading system inThe Hague indicates that the climate regime did not signiﬁcantly affect the initialdiscussion on how to design the EU ETS. The EU Green Paper on emissions trading,which outlined various design options, was published in March 2000 – before CoP6 in The Hague. And the international rules were ﬁnalized later than the proposalfor the emissions trading directive.21 After CoP-4 in Buenos Aires, the Commissionunderstood that it would take time to agree on an international system. In May 1999,the Commission concluded: ‘… the ongoing negotiations in the context of the BuenosAires Plan of Action are not likely to result in a high degree of detail concerning therules and guidelines for international emissions trading’.22 The Commission thusprepared for initiating an EU emissions trading system largely independent of theinternational negotiations. However, the EU ETS was kept as close to the KyotoProtocol as possible (Vis 2006a, 55). For example, the choice of a downstreamsystem has been related to the approach of the Kyoto Protocol. According to Zapfel(2005, 165) a downstream scheme applying to the points of the emission sourceswould make it easier to include all the six GHGs included in the Kyoto Protocol andalso in relation to the territoriality principle where emissions are attributed to thenational inventory of the country where the fuel is combusted.Concerning the timetable for developing an EU ETS, Article 3 of the KyotoProtocol sets the central provisions for the industrialized countries in Annex I ofthe UN Framework Convention on Climate Change. The numerical commitmentsare included in Annex B to the Protocol: ‘The parties included in Annex I shall,individually or jointly, ensure that their aggregate anthropogenic carbon dioxideequivalent emissions of greenhouse gases listed in Annex A do not exceed theirassigned amounts … with a view to reducing their overall emissions of such gasesby at least 5 per cent below 1990 levels in the commitment period 2008 to 2012’.Furthermore, ‘Each party included in Annex I shall, by 2005, have made demonstrableprogress in achieving its commitment under this Protocol.’
20 Earth Negotiations Bulletin (163, 2000), ‘Summary of the Sixth Conference of theParties to the Framework Convention on Climate Change: 13-25 November 2000’, 12:163,18.21 The Commission proposed the ET Directive in October 2001, whereas the Marrakechagreement, which speciﬁed the emissions trading rules, was concluded on 9 November2001.22 European Commission (19 May 1999), COM(99)230, Commission Communicationto the Council and the Parliament. Preparing for Implementation of the Kyoto Protocol(Brussels), 15.
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These provisions largely determined the timetable and speed for the developmentof EU ETS.23 It was clear that the Commission did not have much time to preparefor emissions trading, because emissions patterns cannot be changed overnight.As noted in Chapter 3, the 2005 deadline was immediately included in the ﬁrstJune 1998 Post-Kyoto Strategy Communication from the Commission: ‘ … theCommunity could set up its own internal trading regime by 2005 as an expression ofits determination to promote achievements of targets in a cost-effective way’.24 Thisdeadline was repeated in the 1999 Communication ‘Preparing for Implementationof the Kyoto Protocol’25 and became the focal point for both the Green Paper onemissions trading and the Commission’s proposal for an emissions trading directive.The proposal suggests a pilot phase for EU ETS from 2005 to 2007. As for the KyotoProtocol’s Article 17 on emissions trading, the 2005 deadline was not an integral partof the EU’s negotiating position at Kyoto.26 Moreover, the EU preferred a ﬁxed datefor reductions (2010) rather than the 2008–12 commitment period. This indicatesthat the Kyoto Protocol ﬁxed the timetable for the EU ETS. According to Vis (2006a,39), the pressing time limits of the Kyoto obligations were a main reason for therapid adoption of the EU ETS.Article 4 of the Kyoto Protocol allows the EU to operate under a burden-sharingagreement (BSA), often referred to as the EU ‘bubble’. This agreement, reached in1998, divides the EU’s target agreed in Article 3 of the Protocol into differentiatedtargets for each of the then 15 member-states (see Chapter 1). The BSA representsthe core of the EU’s implementation of the Kyoto Protocol, the framework forEU climate policy and the development of the EU ETS. According to Article 4:‘Any Parties included in Annex I that have reached an agreement to fulﬁl theircommitments under Article 3 jointly, shall be deemed to have met those commitments… in accordance with the provisions of Article 3. The respective emission levelallocated to each of the Parties to the agreement shall be set out in that agreement’.This text allows the EU and the member-states to fulﬁl their commitments jointlythrough differentiated commitments between member-states. Furthermore, Article4 states: ‘If Parties acting jointly do so in the framework of, and together with, aregional economic integration organization, any alternation in the composition ofthe organization … shall not affect existing commitments under this Protocol’. Thisimplies that the enlargement of the EU with 10 new members on 1 May 2004 did notaffect the Burden-sharing Agreement: the new member-states were automaticallyincluded in the EU ETS.
23 Interviews in Brussels, 12 January 2006.24 European Commission (June 1998), COM(98)353, Commission Communicationto the Council and the Parliament. Climate change – Towards an EU Post-Kyoto Strategy(Brussels), 20.25 European Commission (19 May 1999), COM(99)230, Commission Communicationto the Council and the Parliament. Preparing for Implementation of the Kyoto Protocol(Brussels).26 European Commission (June 1998), COM(98)353, Commission Communicationto the Council and the Parliament. Climate change – Towards an EU Post-Kyoto Strategy(Brussels), 5.
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In contrast to Article 17 and the timetables included in Article 3, Article 4 waslargely, but not fully, in line with the negotiation position of the EU. Since 1995, theEU had worked to hammer out a burden-sharing agreement, for various reasons.First, a common position would strengthen the EU negotiating position in Kyoto.Second, the signiﬁcantly differing energy production and consumption patterns ofthe EU member-states made it difﬁcult to set identical targets for each one. The EUreached an internal BSA in March 1997 – nine months before the Kyoto negotiations.The environmental ministers agreed to propose a 15 per cent cut in emissions of threegreenhouse gases by 2010.27 The agreement was based on the ‘Triptych Approach’,which separated national economies into various sectors. This justiﬁed differentiatedtargets for the EU member-states, as some relied heavily on coal whereas othersrelied on emission-free nuclear power (see Ringius 1999).During the Kyoto negotiations, the EU had to accept provisions that necessitateda revision of the initial Burden-sharing Agreement. The number of greenhouse gaseswas increased from three to six.28 Moreover, the agreed reduction target was 8 percent between 2008 and 2012 rather than 15 per cent by 2010. This led to new internalburden-sharing negotiations in the wake of the Kyoto Protocol. In June 1998, themeeting of the EU Environmental Council of Ministers agreed to distribute the 8per cent target to varying commitments among the member-states. For example,Germany and Denmark would have to reduce emissions by 21 per cent, whereasPortugal was allowed to increase its emissions by 27 per cent. The Burden-sharingAgreement became legally binding when the EU ratiﬁed the Kyoto Protocol in May2002. The 2002 Council Decision was in itself binding irrespective of the entry intoforce of the Kyoto Protocol (Lefevere 2005, 80). In the implementation phase, theindividual targets under the BSA for EU-15 were linked to the national allocation ofallowances under the ET Directive (see Chapter 6).As noted, the Kyoto Protocol facilitated initiation of the EU ETS by means ofpressure, opportunities and learning. In this section, we have seen that the timetablefor the development of EU ETS was also a product of the climate regime. Thecommitment period included in the Kyoto Protocol and the requirement of showingdemonstrable progress by 2005 determined the time-schedule for the EU ETS. Onlyto a limited extent did the climate regime itself specify the rules for internationalemissions trading on which the EU could base its own system. In fact, the EUdeveloped its own system before the international system had been worked out underthe Kyoto Protocol. The EU ETS was also to become signiﬁcantly more complexand detailed than the international system, as it would be based on company actionsand not governmental actions underlying the Kyoto Protocol.Role of EU Institutions and Non-state ActorsThe climate regime introduced the idea of emissions trading within the EU. However,the Kyoto Protocol in no way required the development of an internal EU ETS, and27 Carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O).28 The three additional gases are hydroﬂuorcarbons (HFCs), perﬂuorcarbons (PFCs) andsulphur hexaﬂuoride (SF6).
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the Protocol had little to say about the speciﬁc design of such an internal system. Canfurther scrutiny of the role of EU institutions and non-state actors shed light on themore speciﬁc development of an internal EU ETS?The Commission’s BEST GroupIn Chapter 2, we proposed that the Commission changed its mind on emissionstrading and initiated the EU ETS independently, not as a response to a request frommember-states. A precondition for this proposition was that the Commission had thesupport of major affected non-state actors – and there is certainly some evidenceof this. The EU had, as noted, voiced a generally sceptical position to ﬂexibilitymechanisms in the negotiations leading up to the Kyoto Protocol. Although thiscan partly be interpreted as a move on the part of the EU to counter suspected USefforts at watering down emerging global targets, it also resonated well with boththe EU’s command-and-control tradition and the preferences of central Commissionofﬁcials. For instance, Jørgen Henningsen, who headed DG Environment work onclimate change throughout much of the 1990s, has been a characterized as a personfavouring command–and–control instruments and a ‘Best Available Technology’approach to environmental policy.29One ﬁrst important development was the change of personnel within theCommission’s environment directorate that took place shortly after the adoptionof the Kyoto Protocol. Henningsen left, and along with him most of the staff whohad worked on climate change issues (Lefevere 2005, 96). In the power vacuumthat followed, Jos Delbeke became the leader of the process of developing climatechange policy instruments. Delbeke holds a PhD in economics and had worked inDG Environment’s economic instruments unit for some years, among other thingsbeing involved in the futile efforts to get the EU carbon/energy tax adopted. Alsoother economists were recruited to Delbeke’s new team.30 Among them were GerKlaassen, Peter Vis and Peter Zapfel. Klaassen had written about possible EUemissions trading in the environmental policy context (Klaassen 1999). Zapfel hadstudied emissions trading in the USA.31 Vis joined the European Commission in1990, had worked on environmental economic instruments since 1997, and becamethe main author of the Commission’s Green Paper on emissions trading in 2000.The other important development was the increasing recognition that new policyinstruments at the Community level were needed to achieve the Kyoto target. Italso became clear that the proposed directive on the carbon/energy tax would notbe adopted, due to the requirement of unanimity. The instrument of emissionstrading thus appeared to be very convenient. It was new and it resonated well witheconomists’ emphasis on cost-effectiveness. Moreover, it could be proposed underthe qualiﬁed majority rule, thereby avoiding the fate of the carbon/energy tax. Acore group of EU ofﬁcials was being formed, dominated by economists open tothe idea of emissions trading, and seeking the swift development of an EU ETS.29 Interviews in Brussels, 26–27 May 2004.30 Interviews in Brussels, 12 January 2006.31 Interviews in Brussels, 26–27 May 2004; 15 May 2006.
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This group grew to include the main formal skills needed: in law, engineering andpolitical science.32 For the sake of simplicity, this group is henceforth referred to asthe ‘Bureaucrats for Emissions Trading’ (BEST) group.Industry was generally far more positive to emissions trading than it had beento the carbon/energy tax. From an industrial perspective, the main difference isthat emissions trading provides companies with a tradable asset, whereas taxesextract revenues from companies. Carbon trading could even offer industries withshrinking emissions an opportunity to emerge with net proﬁts. As early as May1997, the oil major British Petroleum (BP) announced that it planned to set up aninternal emissions trading system, collaborating with the US environmental groupEnvironmental Defense Fund (Morgheim 2000). BP’s CEO John Browne announcedthat BP, as the ﬁrst multinational oil company, would change its climate strategy andcut company-internal GHG emissions. This was followed up by the goal of cuttingemissions by one tenth by the year 2010 (using 1990 as the baseline year), to beachieved by an internal emissions trading system. BP began a pilot trading scheme inSeptember 1998, and full company trading started in 2000 (Victor and House 2006).The other European oil major Shell followed BP by announcing a similar initiativein October 1998.33At the Euro-federation level, BP and Shell pushed EUROPIA towards supportingemissions trading. EUROPIA is composed of over 20 oil companies and representsthe downstream activities of the oil industry within the EU – including reﬁnerieswhich became part of the EU ETS. EUROPIA changed its position, from beingone of the most aggressive opponents of EU climate policy and the carbon/energytax in the early 1990s to welcoming emissions trading (Skjærseth and Skodvin2003). In general, EUROPIA supports the positions of the Industrial and Employers’Confederation of Europe (UNICE) on climate change.34 And, in an April 1998position paper, UNICE cautiously supported emissions trading – however, stressingthe need for a ‘well-designed’ and ‘rigorous’ system.35The support of these companies and organizations was a clear inspiration tothe BEST group, who could see them as important strategic partners. Support fromimportant industry organizations and major companies would also increase thelikelihood of support from other parts of the Commission with responsibility forindustry and competition. When the major European oil companies – which makea living from two of the major causes of anthropogenic climate change, oil and gas– voluntarily implemented emissions trading, that obviously made it more difﬁcultfor other industries to oppose the idea. Even though industry in general preferredemissions trading to taxes, most industries would rather have voluntary agreements
32 See Delbeke (2006) for biographies of the core team.33 ENDS Daily (16 October 1998), ‘Shell Adopts Kyoto Emissions Cut Commitment’,Issue 398.34 EUROPIA (1999), Activity Report (Brussels: EUROPIA).35 According to ENDS Daily, there was a Commission ‘strategy document’ on emissionstrading to be published in May 1998; thus it is reasonable to see the UNICE position paperas an input to that document. ENDS Daily (7 April 1998), ‘EU Firms Call for Rigorous GasTrading Rules’, Issue 282.
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than emissions trading in climate policy.36 This preference order is hardly surprising:voluntary agreements are a ‘softer’ policy instrument than emissions trading,particularly with regard to enforcement.The most eager proponents of voluntary agreements were main power-consumingindustries like cement and steel.37 As further discussed later, at this stage there werealso some country-speciﬁc differences with regard to industry positions: for instance,British industry was generally more positive to emissions trading than Germanindustry (which already had ﬂexible voluntary agreements). The main point is that,despite variations in positions on emissions trading and considerable uncertaintyabout this instrument, there was little reason to expect the sort of massive and outrightopposition from industry that had been experienced in the case of the carbon/energytax (Skjærseth 1994).But what about the traditional industry counterparts, the ENGOs? During theKyoto negotiations, most European-based green organizations joined in opposingemissions trading under the slogan ‘trading pollution is not a solution’. In theimmediate post-Kyoto phase, they were mainly concerned with the possibilities ofa Russian sale of ‘hot air’ and how polluters could ‘buy themselves out’ instead ofdealing effectively with their own emissions (see Chapter 1).38 However, some earlycracks in the ENGO position can be noted. For instance, responding to the April1998 UNICE position paper, Liam Salter of Climate Action Network Europe (CNE)stated: ‘it is a good idea for companies to start working out how the mechanismswill work in practice’.39 He welcomed UNICE’s emphasis on a ‘rigorous’ systemand emphasized the need for trading to take place under an effective overall regime.But it was not until October 2000 that the CNE developed and published an ofﬁcialposition paper on the EU ETS.The Commission knew that at least some of the ENGO trading resistance wasrooted in the ﬁght with Washington over the form of the Kyoto Protocol. Given theenvironment directorate’s generally good relationship to the ENGO community, theBEST group probably reckoned they could convince at least the core actors withinthis community (like the CNE) about the virtues of trading (see for example Grantet al. 2000, 21). The Commission knew that it would be difﬁcult to get support foremissions trading from the European Parliament in the decision-making phase if themajor ENGOs strongly opposed it.In late spring 1998, at least one important obstacle remained for the BESTgroup in terms of preparing the ground for a radical shift of the DG Environment’sposition on emissions trading: convincing Environment Commissioner, RittBjerregaard. She had experienced the ﬁght with the USA over the Kyoto Protocol
36 Judging from the positions taken by UNICE and other industry actors at a workshoparranged by the Commission’s Industry Directorate in October 1998, the main climate policyinstrument priority of industry was voluntary agreements, with emissions trading as animportant supplementing instrument. ENDS Daily (9 October 1998), ‘Industry Calls for EUClimate Agreements’, Issue 393.37 Interviews in Brussels, 15–16 May 2006.38 See Chasek (1998) and Zapfel and Vainio (2002, 6).39 ENDS Daily (8 April 1998), ‘Industry Emissions Trade Position Welcomed’, Issue 283.
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and was inﬂuenced by the general EU scepticism towards ﬂexibility mechanismsand emissions trading. Although Bjerregaard was on good terms with BEST’s keyman Jos Delbeke, tactical skill was certainly also needed. So in discussions withBjerregaard, Delbeke framed the emissions trading idea cleverly. He underlinedhow the setting of caps would ensure the certainty of environmental outcomes, andthat good monitoring and veriﬁcation were both essential and feasible.40 In the end,he succeeded in converting the previous ﬂexibility-sceptical commissioner.41The emphasis on a ‘cap-and-trade’ system which would guarantee a positiveenvironmental outcome, rather than a ‘baseline-and-credit’ system, was alsoimportant for persuading the ENGOs. As shown in Chapter 3, the idea of an internalEU ETS was ofﬁcially launched in the June 1998 Communication on an EU postKyoto strategy. Delbeke’s cautious framing of the issue is also evident in the wordingof this Communication, with its emphasis on quantitative ceilings on the use of theﬂexible mechanisms, and not least the need for strict monitoring and penalties fornon-compliers.Summing up, this part of the story indicates that it was the Commission – withthe help of the Kyoto Protocol – that launched the idea of an internal EU ETS. Animportant condition for the Commission’s initiative was cautious support and lackof outright opposition from industry. Important industry federations immediatelysignalled a much more positive attitude to emissions trading than to taxes. Somemajor companies were even proactive – like BP, which served as an inspiration forthe Commission.From Knowledge Building to Green PaperRevision of the Burden-sharing Agreement was the main priority for the EU untilJune 1998. With regard to the internal EU ETS test balloon launched in the June1998 Communication, DG Environment got a very poor response.42 EU attention toemissions trading was directed mainly at the international level, with the expectationof clarifying the rules at the November 1998 CoP-4 in Buenos Aires. Moreover,the EU Commission had to devote considerable time and resources to the debatefollowing Article 17 of the Kyoto Protocol that trading should be supplemental todomestic action. The EU went to CoP-4 arguing for an unspeciﬁed limit to be set oncountries’ use of the ﬂexible mechanisms. The process of clarifying exactly what a‘concrete cap’ on these mechanisms should mean for the EU continued well into thespring of 1999.43 No wonder then that thinking about the more speciﬁc design of anEU ETS was not taken very much further in the 1999 Communication on ‘Preparing40 Interviews in Brussels, 12 January 2006.41 When for instance Bjerregaard was interviewed by International EnvironmentReporter in June 1998, she spoke about emissions trading in quite positive terms. InternationalEnvironment Reporter (24 June 1998), ‘EU Agrees on Burden-sharing Plan for Emission Cutsunder Kyoto Protocol’. 21:13, 608–9.42 Interviews in Brussels, 12 January 2006.43 The issue was then temporarily resolved in mid-May 1999, when agreementwas reached on a ceiling produced through a complicated formula that would equate toapproximately 50 per cent of national commitments. The US reception to this proposal was
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for Implementation of the Kyoto Protocol’, compared to the 1998 Communicationlaunching the idea of an internal EU ETS. Another major reason for lack of progressin this period was simply lack of knowledge: the BEST group did not know enoughabout what an EU ETS should or could look like.As noted in Chapter 3, the ETS Green Paper published in March 2000 took thedesign discussion a substantial step further. The following main design preferenceswere put forward in the Paper: (1) a cap-and-trade system, based on a total cap onemissions covered by the system; a centralized setting of the national caps/ceilingswas indicated as preferable; (2) a downstream system, covering a rather narrow set ofsectors (with the LCP and IPPC Directives offering reference points), with electricityand heat production as the prime target; (3) auctioning as the technically preferablemethod of allocation; (4) strict penalties and a robust enforcement regime.This development from vague idea to speciﬁc design proposal can be traced backto knowledge-building in the European Commission. In January 1999 the Foundationfor International Law and Development (FIELD), together with the Center for CleanAir Policy (CCAP) in Washington, were commissioned by the European Commissionto undertake a study of design options for the implementation of an emissions tradingregime for greenhouse gases in the European Union. The objective of the studywas to propose design options for an emissions trading system that would take intoaccount previous experience and ongoing UNFCCC negotiations, and assess howsuch a system could be combined with Community legislation, domestic policiesand measures and use of the Kyoto mechanisms. 44The external consultants FIELD and CCAP produced seven ‘scoping papers’along the way (see for example Kerr 1999), before publishing their two main inputsin February 2000 (FIELD 2000; CCAP 2000). Their work and reports discussedall the main design issues subsequently taken up in the Green Paper. As stated byone of the process insiders, ‘what was really advancing behind the scene were theconsultant reports’.45 With regard to the type of system, it was noted that both a capand-trade system based on past emissions and a baseline-and-credit system relatedto output could involve problems of possible undesirable incentives. For example,cap-and-trade could reward low energy efﬁciency in the past, while baseline andcredit could create incentives to increase output (Kerr 1999). However, the main,ﬁnal report began by noting that ‘the most successful trading schemes around theworld are cap-and-trading schemes’, and hence took such a design as the basis forthe ensuing design discussion (FIELD 2000, 12). Furthermore, in 1999, UNCTADpublished a report on emissions trading that clearly recommended cap-and-tradebetween private entities rather than baseline-and-credit, for both environmentaland economic reasons (Tietenberg et al. 1999). 46 This recommendation was based
very negative. ENDS Daily (19 May 1999), ‘USA Slams EU Kyoto Trading Cap Plan’, Issue534.44 FIELD, ‘Working towards an Emissions Trading Directive for the European Union’,<www.ﬁeld.org.uk/climate_4.php> accessed 16 May 2007.45 Interviews in Brussels, 15–16 May 2006.46 The experience collected in the UNCTAD report was cited in the FIELD report.
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mainly on US experience with both types of systems.47 Cap-and-trade thus servedas a premise in the early EU deliberations on design, even though it was challenged– by power-consuming industry in particular.Furthermore, although an upstream approach rated higher than a downstreamapproach on efﬁciency and environmental effectiveness grounds, a downstreamapproach was perceived as more politically feasible as it would naturally be limitedto major industrial sectors (FIELD 2000, 5). As a downstream system could notfeasibly target millions of individual fuel users, it would be limited to major industrialsectors like electricity, steel, chemicals and cement (Ibid., 23).With regard to method of allocation, auctioning of permits was seen as preferable,with allocation for free only as a second-best option. A centralized, EU-level approachwas recommended with regard to decisions about the number of allowances to beallocated to the trading system in the aggregate and to each member-state (CCAP2000, 53). More speciﬁc distribution decisions should remain at member-statelevel, with the Commission in an active watchdog role to ensure compliance withcompetition and state aid rules (FIELD 2000, 31).As to monitoring, veriﬁcation and enforcement, a certain degree of harmonizationof rules was deemed necessary for the effective functioning of the system.Furthermore, non-compliance should be addressed by strong, automatic ﬁnancialpenalties that should ‘far exceed the price of allowances’ (ibid., 33). The need forstrict enforcement and compliance systems, particularly the need for high penalties,came from the body of US experience (CCAP/FIELD 1999).Relevant knowledge-building also took place within industry. The electricityindustry’s Euro-federation EURELECTRIC was described by the Commission as‘the elephant in the corridor’, as it was clear that the electric power producing industrywould represent a core target group for the ETS.48 EURELECTRIC convened aworkshop on a possible emissions-trading simulation exercise in February 1999 anddecided to carry out such an exercise later in 1999 (EURELECTRIC 1999). Part ofthe inspiration for this initiative came from electricity industry delegates’ study ofUS sulphur trading in