European European Carbon Carbon

Emissions Emissions Trading Trading SchemeScheme

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Karoliina LehtonenKaroliina Lehtonen

What is the EU ETS?

• Largest multi-national greenhouse gas emissions trading scheme in the world

• Created in conjunction with the Kyoto Protocol

– 1997 international treaty that came into force in 2005

What’s the problem?• Goods and services that are produced that result in carbon

emissions are provided in the market at too low a price and too high a quantity.

QUANTITYQUANTITY

PRICEPRICE

Why do we need the EU Why do we need the EU ETS?ETS?

• Trading is economically efficient in reducing carbon emissions

• More flexible than taxes or direct regulation

• Will bring cleaner technologies to market

• Provides business opportunities

Proposed Remedy

• EU Commission introduced the European Union Emissions Trading Scheme (EU ETS)

• Reduce gas emissions 8% below 1990 levels under the Kyoto Protocol

• Conjunction with Kyoto Protocol

• Fifteen member states of the EU commenced operation on January 1st 2005

• Develop a cap and trade system

How does the EU ETS work?How does the EU ETS work?

• Divided into phases (phase 1 and phase 2)

– Phase 1 (2005-2007)

– Phase 2 (2008-2012)

• Each member state develop a NAP

• Overall ‘cap’ on total amount of emissions

• 1 allowance = 1 tonne of CO2

• Allowances distributed to installations; installations are monitored

• Surrender allowances at the end of each year

• Trading allowances

Does it internalize the externality?

• Effectiveness = tightness of caps

• Phase 1: NO

– Over allocated allowances

– Little incentive to reduce CO2 emissions

• Phase 2: Possibly– Stricter caps– Includes aviation CO2 emissions

Negative Externality Model

BibliographyBibliography

• http://www.climatechange.com.au/2008/04/08/emissions-trading-the-pros-and-cons/

• http://www.defra.gov.uk/environment/climatechange/trading/eu/how.htm

• http://www.defra.gov.uk/environment/climatechange/trading/eu/why.htm

• www.economicshelp.org

• www.carbonemissionstradingscheme.com

• http://www.defra.gov.uk/environment/climatechange/trading/eu/why.htm

• www.deviantart.com