The EU Emissions Trading System and Climate Policy Towards 2050: Real Incentives to Reduce Emissions and Drive Innovation?

Abstract

With the EU Emissions Trading System (ETS) now entering in its seventh year of operation, this report takes stock of the largest multi-sector greenhouse gas trading scheme in the world. It reviews the experiences of the pilot phase from 2005-07, assesses the adjustments introduced in the second phase (2008-12) and looks ahead to the radical changes that will come into effect in the third phase starting in 2013. The assessment is based on a literature review of recently published ex-post analyses and ex-ante studies and draws as well on our own calculations. It investigates the main controversies surrounding the EU ETS, such as its environmental effectiveness, economic rents, windfall profits and fairness, the role of CDM and JI and its impact of on industrial competitiveness. It also evaluates the scheme’s ability to promote innovation and low-carbon technology deployment. Finally, the study addresses the fundamental question of whether the ETS has lived up to its promise to “promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner”, and if not, what are the prospects of its doing so in the future and what additional changes will be required.

Keywords: EU, Emissions Trading System, ETS, experiences, pilot phase, calculations, environmental effectiveness, economic rents, windfall profits, fairness, industrial competitiveness