A first look at how the EU emissions trading scheme is working

The EU's emissions trading scheme (ETS) was introduced for a three-year trial period in 2005, and this initial analysis looks at how well it is working using data from the first two years of operation. The research concludes that both over-allocation and a reduction in CO2 emissions occurred.

This research provides insights on the extent to which over-allocation of EU Emissions Allowances (EUAs) or reduction of emissions took place and the researchers believe it provides a good indication of the final position at the end of the trial. On average CO2 emissions at factory level were 60 million tonnes or 3 per cent lower than the allocations that were distributed to these installations. This has been interpreted as evidence of over-allocation of allowances, despite higher than expected initial prices for carbon trading. However, a number of other interpretations are possible. For example, industries may have reduced emissions in order to sell allowances or to use them in later years.

In terms of over allocation of EUAs, figures vary considerably across individual member states, with some countries showing a considerable over allocation (e.g. Lithuania, Estonia and Latvia) while other countries appear to have significant under-allocation (e.g. UK, Ireland and Italy). Carbon trading took place inside countries, but there were also net transfers between member states.

Taking the EU as a whole, this study suggests a possible over-allocation of up to 125 million EUAs. This probably resulted from an underestimate of the amount in emissions industry would be able to reduce. Reductions in emissions occur when managers make small incremental changes in production to take account of new economic realities. Although small on an individual scale, cumulatively these changes can make a perceptible difference.

Abatement is judged as the difference between actual CO2 emissions and an estimation of what emissions would have been without the EU ETS. Despite a lack of perfectly comparable historical data, the research concluded that it was unlikely that CO2 emissions would have declined in the absence of the EU ETS and the significant price that was paid for CO2 emissions in 2005. Figures suggest a reduction of between approximately 130 and 200 million tonnes in 2005 and between 140 and 220 million tonnes in 2006. This equates to a 7-8 per cent reduction in emissions compared with estimates of what emissions would have been without ETS.

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