European Emissions Trading in Practice
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European Emissions Trading in Practice

An Economic Analysis

Stefano Clò

This unique and up-to-date book analyses the functioning of the European Emissions Trading Scheme (ETS) and assesses the extent to which relevant legislation has affected its capacity to promote cost-effective reduction of European carbon emissions.
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Chapter 5: Analysis of the Effectiveness of the EU ETS: Assessing the Stringency of the ETS Cap

Stefano Clò


1. INTRODUCTION The general purpose of Chapter 5 is to bring new insight to the widespread debate aimed at assessing the effectiveness of the ETS in promoting emissions reduction in a cost-effective way, as stated in the ETS Directive. In particular, we analyse the extent to which MS are effectively relying on the ETS to comply with their Kyoto commitments. This analysis is then used to determine whether the emissions reduction burden deriving from the ratification of the Kyoto Protocol has been divided between ETS and non-ETS sectors in a cost-effective way. Therefore, this chapter focuses mainly on the ETS cap and on its stringency, where the ETS cap indicates the proportion of emissions that the ETS sectors are legally required to abate and, consequently, the amount of emissions that the non-trading sectors have to reduce by in order to comply with Kyoto commitments. The stringency of the ETS cap is assessed by investigating whether allowances have been over-allocated during the first and second ETS trading periods. Different methodologies have been suggested to measure the size of allowances over-allocation. Over-allocation is here defined here as occurring when the ETS cap exceeds a theoretical ETS cap that would impose on the ETS sectors an emissions reduction burden proportional to the share of European emissions they produce. This approach allows us to assess whether the emissions reduction burden has been split among ETS and non-ETS sectors in a cost-effective way, highlighting to what extent the EU and different MS rely on the...

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