Design, Experiences and Issues
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Mikael S. Andersen, Birgitte E. Olsen, Stefan Speck, Janet E. Milne and Hope Ashiabor
Chapter 5: The EU emission trading scheme: first evidence on Phase 3
Since 2005, the EU emission trading scheme (EU ETS) has been the EU’s key instrument for reducing greenhouse gas emissions from industry and from energy supply. Phase 1, the pilot phase, which ran from 2005 to 2007, and Phase 2, which covered the Kyoto commitment period 2008 to 2012, dampened expectations regarding the scheme’s performance: due to surplus allocation prices plumped, generating only a weak signal for investment in low carbon technologies. While surplus allocation in Phase 1 was the result of incomplete information, in Phase 2 it was caused by an exogenous effect, that is, the decline in emissions following the financial and economic crisis. Based on the lessons learnt from the first trading phase, several changes of the design of the EU ETS were adopted in 2008 that should help generate a stringent cap translating into carbon prices inducing low-carbon investment. First evidence on Phase 3 shows, however, persistently low carbon prices in the range of 5–6€ as of October 2014. In this chapter, the underlying developments will be investigated. After describing the changes in the design of the EU ETS in Phase 3 compared with the previous trading periods, empirical evidence on allocation, emissions and carbon prices in the EU ETS in the period 2005–2013 is presented. Empirical results confirm a structural surplus of allowances that is analyzed in the next section. The final section concludes.
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