The EU's Emissions Trading Scheme: Achievements, Key Lessons, and Future Prospects. Egmont Paper No. 40, December 2010

d'Oultremont, Clémentine. (2010) The EU's Emissions Trading Scheme: Achievements, Key Lessons, and Future Prospects. Egmont Paper No. 40, December 2010. [Policy Paper]

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Abstract

Launched in 2005, the European Union Emissions Trading Scheme (EU ETS) is the first and largest cap-and-trade system of allowances for emitting greenhouse gases in the world. As such it represents a valuable policy experiment from which lessons can be drawn. Despite the diverse achievements of the EU ETS so far, the scheme is still far from having fulfilled its theoretical potential. Although it has been proven that the scheme led to abatement during the first phase, carbon prices have remained too low to promote investments in the development, diffusion and deployment of low-carbon technologies. Yet, if the EU wants to achieve the long-term challenge of ‘decarbonising’ its economy, a credible and long-term carbon price is needed to insure green investments. The lack of reliable and verified data for emission projections and the industry and Member States’ fear of the scheme’s economic costs led to a first phase with many design shortcomings. Some of these shortcomings were solved in the second phase but most have remained. In order to address the scheme’s design flaws and, thereby, improve the scheme’s credibility in its future Phase III, the ETS Directive was thoroughly revised in 2008. The analysis of the revised directive shows that most of the lessons from the earlier experience have been learned. However, since this revision, the economic crisis occurred and has greatly undermined the efficiency of the ETS, changing the political and economic landscape in which the EU’s climate policy was projected. By reducing industrial production, the economic recession has certainly reduced emissions but has also ensured that carbon prices stay low in the forthcoming years, delaying the necessary shift towards a low-carbon economy. In order to prevent Phase III from being rendered ineffective before its start and in order to ensure the EU ETS’ credibility as an effective means of reducing emissions, the ETS cap must be unilaterally revised towards an objective of 30% emission reduction by 2020. This would not only correct the negative consequences of the economic recession on the scheme but would also boost investment in the development of green technologies. Besides, the future of the scheme will very much depend on the international context, which is far from clear. While the negotiations for a global climate agreement are progressing painfully, the ambition of the EU to link up its ETS with other trading systems in order to progressively build up an international global carbon market is very uncertain due to the waving will of external actors. Developments at the international level have created further uncertainties, hindering investment in green technologies. Against this background, this paper will analyse the lessons learnt so far from the EU ETS in order to have a better perspective of its future. After a general outline of the EU ETS (§ 1) its main achievements will be considered (§ 2). Next, the various shortcomings of the scheme in its first phase and ongoing second phase will be analysed (§ 3), followed by a description of the new design features of the revised scheme post-2012 (§ 4). Then, it will be assessed how the shortcomings of the first years’ experience have been taken into account in the revised ETS scheme as well as how the recession has since then undermined these improvements, thereby reducing the efficiency of the future scheme (§ 5). Finally, the lessons learnt from the EU ETS so far and what they tell us on the future prospects of the scheme will be summarised in a conclusion.

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