European Union and Emissions Trading

Viewed as one of the most important environmental policy developments of the past decade, the EU ETS is an ambitious effort by the EU to correct for the market failure that surrounds climate change, and to deliver the EU’s commitments to reduce carbon dioxide emissions under the Kyoto Protocol. It aims to address the reduction of emissions of CO2 by allowing energy-intensive industrial plants and electric utilities to trade rights or allowances to emit CO2. According to Ellerman, and Buchner, “although there is evidence that some Member States and sectors received over-generous allowances, the main goal of limiting CO2 emissions has been achieved” (Ellerman, 2007). The EU has succeeded in placing a price on CO2 that starts to reflect the scarce capacity of the earth’s atmosphere to absorb more greenhouse gas emissions. To date the EU ETS is by far the largest emissions-trading scheme in the world. With coverage of about half the CO2 emissions originating from a region of the world that accounts for 20% of global GDP and 17% of the world’s energy-related CO2 emissions. Interestingly, the problems that are often seen as dooming a global trading system which at times can be issues involving international financial flows, and institutional readiness. However, such issues haven't appeared in the EU ETS, at least not yet. The more serious problems that emerge from the brief experience of the EU ETS are those of developing a central coordinating organization, devising side benefits to encourage participation, and dealing with the interrelated issues of harmonization. (Joskow, 2008). The institutional disparities between East and West in Europe are not as great as those between North and South on the global scale, but they are still large. It took more time to put the necessary regulatory infrastructure of trading in place in Eastern Europe than it did in the West, but it was done and the companies in the New Member States are complying and increasingly learning to price...