School of the Environment-University of Toronto

ECF 402 - Environmental Finance Case Study: EU ETS


Climate change has emerged as a leading environmental challenge facing humankind. Climate change and regulations that are emerging to manage it are driving a fundamental transition towards a carbon constrained economy. Carbon finance in its narrowest sense is a stream of revenues from the creation and transaction of a carbon asset. The practice of carbon finance however is a much broader topic requiring fundamental understanding of climate change policies, risks, market mechanisms to achieve greenhouse gas (GHG) reductions, Cap and Trade, carbon trading, corporate strategy and more. This course will provide students with critical information on the development of the carbon markets in North America drawing on the experience of the EU under the Kyoto Protocol. Students will examine an overview of the regulatory developments in Canada and the United States, and will engage in discussions on how carbon markets will develop in North America.

The objectives of this course are to:

  • Provide background on basic carbon finance concepts and the context in which they have evolved
  • Provide background on the evolution of the market mechanisms internationally and various domestic systems with a focus the European Union Emissions Trading System (EU ETS) due to its evolved nature
  • Provide information on the manner in which the EU ETS operates and an examination of the nature of the instruments traded, the national allocation programs, the role of offsets, the compliance regime, and the markets that have evolved in the EU to trade in both allowances and offsets.
  • Analyse cap and trade and carbon tax as mechanisms to limit and reduce GHGs in the atmosphere and assess real-world application of cap and trade in the EU Emissions Trading Scheme
  • Focus on the experiences of the EU ETS in terms of designing a trading system in the North American context


By the end of this course, the student should be able to:

  • Understand the background of the evolution of the market mechanisms as well as to understand their role in dealing with climate change
  • Be intimately aware of and understand the operations of the EU ETS
  • Evaluate the regional systems in place or being proposed in North America
  • Understand how a North American carbon trading system can improve upon the EU ETS model
  • Discuss how a real live cap and trade system would work in the North American context
  • Identify the political and economic issues that need to dealt with prior to such a North American system becoming a reality
  • Describe the carbon market internationally and domestically as well as the drivers of carbon prices
  • Understand the role of offsets in a cap and trade system

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