Carbon-Trading-2The European Union’s Emissions Trading System (EU-ETS) is an extremely important component of global climate policymaking. It represents more than 80% of the global market value of emissions trading permits and serves as the cornerstone of the EU’s response to climate change. Moreover, a number of other States and sub-national actors, such as California – which has the second largest carbon trading program in the world – have either linked their emissions trading systems to the EU-ETS, or contemplate doing so in the future.

However, with the price of allowances plummeting a startling 83% from 2008-2013 the EU-ETS is abjectly failing to meet either of its primary objectives: to drive fuel-switching and energy efficiency initiatives, and enhance the market penetration of low and no-carbon technologies. Indeed, the very future of the EU-ETS and its potential role as an effective climate policy model has been placed into question.

How did this happen? During the initial stages of implementation poor historical emissions data, pressure to maximize the allocation of allowances (European Union Allowances, or EUAs), and the global recession resulted in an over-allocation of allowances and reduced demand. This resulted in a 69% decline in the price of allowances in less than a year, and a market surplus of more than 1 billion allowances. With the surplus of EUAs projected to grow to more than 2 billion by 2020, the EU-ETS is increasingly threatened with irrelevance as a climate policymaking mechanism and model.

How should the current state, and history of the EU-ETS influence climate policy considerations in the US? Are there carbon trading policies better suited to reach the goals set by the EU-ETS while avoiding the associated problems?

Additional resources:

EU ETS Myth Busting: Why it Can’t be Reformed and Shouldn’t be Replicated
Climate Change and the EU Emissions Trading Scheme (ETS): Looking to 2020
Mapping Carbon Pricing Initiatives: Developments and Prospects