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European Union Emissions Trade Scheme Essay

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Updated: Nov 27th, 2019


The Kyoto Protocol placed certain obligations on developed countries to reduce greenhouse emissions due to its adverse effects on the environment. In response to the impending international obligations, the European Union leaders came up with a program known as the European Union Emissions Trade Scheme (Delbeke, 2006). The Scheme was proposed in October 1, 2001. It was to be implemented in several phases.

The first trial period was 2005-2007 before the Kyoto Protocol rules become binding in the period 2008 to 2012. The objective of the scheme was to reduce carbon dioxide emissions significantly. There have been successes and failures in the eyes of critics who analysed the implementation of the scheme during the first trial period. The system started with only one gas, carbon dioxide gas, as it was a new system.

It was felt there was need to build knowledge and program architecture. In the later phases of the program more sectors that required reduction in emission of gases would be included. The second trading period covers the current period, 2008-2012. There are several features of the scheme. There is a cap on the quantity of carbon dioxide emissions that that was placed on over 12,000 locations in the European Union.

There are tradable allowances given to the facilities for free. Thirdly the facilities have to annually measure their carbon dioxide emissions. They have to report the level of emissions and surrender allowances for the tonnes of excess carbon dioxide emitted. It is a cap and trade market system. There is an overall cap but the participants are allowed to trade allowances. These allowances are also known as permits.

One allowance given to a company allows it to produce a tonne of carbon dioxide.

The permits were meant to be scarce in the market and are therefore priced. The pricing of the permits was to create an incentive for companies to use less polluting technologies in production of their products.

The cap and trade market offers flexibility to companies on whether to purchase permits or adopt lower emissions technologies or practices. Any company that produces carbon dioxide in excess of the emissions incurs a penalty of £ 100 per excess tonne of carbon dioxide emitted. Furthermore the company will have to surrender permits for the excess quantity emissions.

The government of the company the country operates in may also impose further penalties. After the first initial period, there have been amendments proposed by the European Commissions to the Emissions Trading Directive, the body responsible for the implementation of the Scheme. The amendments proposed were brought forward after consultations with several stakeholders.


Despite the criticisms on certain aspects the European Union Scheme, it did work to abate the release of carbon dioxide gas. To measure the reduction in emission one needs to look at what would have been emitted with the absence of the Scheme. The measurement has to include items such as economic growth, weather and energy prices (Delarue et al, 2008).

It has been noted that the gas emissions were lower in 2005 and 2006 than the baseline emissions gap that had been given for the first National allocation plans (Ellerman & Buchner, 2008). This is great considering economic growth and the price increases that were experienced in the natural gases and oil markets.

The high prices must have increased the demand of coal generation. 2005-2007 was an initial trial period and the abatement rates set were modest. In subsequent periods, considering the emissions data for the trial period, the abatement rates are expected to be higher. Overall the Scheme is a great system. All that is required are several amendments. As it was the initial trial period there are a lot of lessons that have been learnt by the European Union Leaders.


Criticism of the EU system began immediately it was implemented in 2005. There were several issues that the critics highlighted. One of the problems highlighted was the issue of windfall profits. There were companies who made high profits due to the high electricity prices.

The carbon dioxide prices were included in the electricity prices. This was wrong since the allowances given to the companies were free (Sijm et al, 2005). There was an increase of 30% increase in electricity prices in France and Germany. In Scandinavia the electricity prices rose by 50% while in the UK the electricity prices rose by 80%. The consumers suffered due to the higher costs (International Energy Agency Editors, 2007).

The companies succeeded in making high profits yet they wee not reducing their gas emissions due to the excess permits. The second issue was over-allocation showing that the emissions caps may not have been set appropriately.

They may have been set so low such they did not constrain companies sufficiently. It is argued that there were too many allowances created in the European Union member states such that the EU gap was no longer binding on any facility. The governments pushed to determine the quantity of permits that there would allocate to their industries.

They then proceeded to overestimate the level of emissions the industries produced so that they could get excessive allowances. This had an adverse effect. In the first trial period, there were only three countries that had emission caps that were lower than the 2005 baseline level. This resulted to the reduction in permit prices to £0.03 at the end of December 2007.

This has led to the European Union tightening the cap in the second phase of the scheme. Critics however are not satisfied since there are seventeen countries whose 2012 emission caps are still higher than the 2005 emissions levels. Another criticism was in the area of price volatility.

The price ranged from £30 to £0.03 in the trial period. This has had adverse effects on the overall objective of reducing carbon dioxide emissions. This volatility was accelerated by the restriction of banking in the first two years. Banking in the Scheme is where the companies are allowed to carry over unused allowances or permits to subsequent years.

The restriction of banking due to over allocation of permits caused the prices to collapse. In the second and third phases banking will be allowed from the beginning of the periods to curb this problem. Furthermore the EU has verified and accurately measured emissions data that will lead to real reduction of emissions. One and a half years had passed before the emissions data was released in the first trial. The early data was essential as it would have assisted in revising the set the emission gaps.

The reporting information should have been available quarterly similar to the system used by the United States in controlling the emissions of gasses.

When companies have energy efficiency investments that are higher than expected caused by low energy use and carbon dioxide emissions, there is reduced demand for permits. This can work to discourage further green investments. The system can therefore work to obstruct the overall objective of the system of reducing carbon dioxide emissions. There should be ways to increase incentives for companies besides prices.

Global Carbon Trading Scheme

For the expansion of the Scheme globally there has to be several amendments. In the third phase of the Scheme, the European Union hopes to include emissions such as ammonia, aluminium, petrochemicals, Nitrogen and perfluorocarbons. The phase will last for eight years.

First of all there should be a single measure of the allowances or permits used instead of each country having its own allocation plans. The decentralisation in setting the caps have caused a lot of problems for the Scheme (Kruger et al, 2007).The emissions data should also be released quarterly instead of delays in over eighteen months.

The companies receive permits for free therefore the carbon prices should not be included at all in the electricity prices causing certain companies to make supernormal profits. The permits can also be auctioned in the market, a method that is bound to ensure the carbon prices maintain steady high prices (Sijm et al, 2006). This will help avoid consequences of the prices crashing.

There should be appropriate harmonisation strategies. The new countries may have to be treated a bit differently from the countries that have participated in the first and second phases of the scheme. Giving new companies allowances and forcing incumbent companies to forfeit past allowances will cause distortion in the market (Ellerman, 2008).


Delarue, E. et al (2008). Fuel Switching in the Electricity Sector under the EU ETS. Journal of Energy Engineering, Vol 134(2), pp 40-46.

Delbeke, J. (2006). EU Environmental Law: The EU Greenhouse Gas Emissions Trading Scheme. EU Energy Law series, Vol 4(1), pp 30-140.

Ellerman, A. (2008) New Entrant and Closure Provisions: How do they Distort? The Energy Journal, Special Issue, pp.63-76.

Ellerman, A. & Buchner, B (2008). Over-allocation or Abatement: A Preliminary Analysis of the EU ETS based on the 2005-06 Emissions Data. Environmental and Resource Economics, V.39, pp 261-287

International Energy Agency Editors (2007) CO2 allowance and electricity price Interaction: Impact on industry’s electricity purchasing strategies in Europe, IEA Information Paper. Web.

Kruger, J. et al (2007) Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy. Review of Environmental Economics and Policy, I(1) pp. 112-133.

Sijm, J. et al (2006). CO2 costs pass through and windfall profits in the power sector. Climate Policy, 6(1) pp 49-72.

Sijm, J. et al (2005). CO2 price dynamics: The implications of EU emissions trading for the price of electricity, Energy Research Centre of the Netherlands (ECN) Publication, ECN-C-005-081.

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IvyPanda. (2019) 'European Union Emissions Trade Scheme'. 27 November.

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