An extract on #gopromoff
The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. It is one of the EU's central policy instruments to meet their cap set in the Kyoto Protocol.
After voluntary trials in the UK and Denmark, Phase I began operation in January 2005 with all 15 member states of the European Union participating. The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply in excess of 20 MW, such as power plants and carbon intensive factories and covers almost half (46%) of the EU's Carbon Dioxide emissions. Phase I permits participants to trade among themselves and in validated credits from the developing world through Kyoto's Clean Development Mechanism. Credits are gained by investing in clean technologies and low-carbon solutions, and by certain types of emission-saving projects around the world to cover a proportion of their emissions.
During Phases I and II, allowances for emissions have typically been given free to firms, which has resulted in them getting windfall profits. Ellerman and Buchner (2008) suggested that during its first two years in operation, the EU ETS turned an expected increase in emissions of 1%-2% per year into a small absolute decline. Grubb et al. (2009) suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50-100 MtCO2 per year, or 2.5%-5%.
A number of design flaws have limited the effectiveness of the scheme. In the initial 2005-07 period, emission caps were not tight enough to drive a significant reduction in emissions. The total allocation of allowances turned out to exceed actual emissions. This drove the carbon price down to zero in 2007. This oversupply was caused because the allocation of allowances by the EU was based on emissions data from the European Environmental Agency in Copenhagen, which uses a horizontal activity-based emissions definition similar to the United Nations, the EU ETS Transaction log in Brussels, but a vertical installation-based emissions measurement system. This caused an oversupply of 200 million tonnes (10% of market) in the EU ETS in the first phase and collapsing prices.
Phase II saw some tightening, but the use of JI and CDM offsets was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap. For Phase II, the cap is expected to result in an emissions reduction in 2010 of about 2.4% compared to expected emissions without the cap (business-as-usual emissions). For Phase III (201320), the European Commission proposed a number of changes, including:
Setting an overall EU cap, with allowances then allocated to EU members;
Tighter limits on the use of offsets;
Unlimited banking of allowances between Phases II and III;
A move from allowances to auctioning.
In January 2008, Norway, Iceland, and Liechtenstein joined the European Union Emissions Trading System (EU ETS), according to a publication from the European Commission. The Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million metric tonnes of CO2, 8 million of which are set to be auctioned. According to the OECD Economic Survey of Norway 2010, the nation "has announced a target for 2008-12 10% below its commitment under the Kyoto Protocol and a 30% cut compared with 1990 by 2020." In 2012, EU-15 emissions was 15.1% below their base year level. Based on figures for 2012 by the European Environment Agency, EU-15 emissions averaged 11.8% below base-year levels during the 2008-2012 period. This means the EU-15 over-achieved its first Kyoto target by a wide margin.