“ETS, RIP – The failure to reform Europe’s carbon market will reverberate round the world” – The Economist, 2013
The European Union’s cap-and-trade scheme aiming to reduce greenhouse gas emissions has been proclaimed dead not only by The Economist. Is it really that bad? We take the United Nation’s point of view that human made greenhouse gases accelerate Global Warming. The success in the first international emission trading scheme, and until today also the world’s largest, is therefore a major milestone in fighting greenhouse gas emission. If it failed, this would be a major setback for emission reduction. So has it really failed as The Economist states?Undoubtedly, there seems to be an issue. Emission prices fell from over 30 Euro per ton of CO2 equivalent to under 5 Euro. Has oversupply destroyed the emission market and the emission trading scheme?
Economic potential is not the same as political goals. The first two phases of the EU Emission Trading Scheme (EU ETS) were merely a familiarizing with the concept of emission trading and how to deal with administrative challenges. Since emission allowances were allocated for free based on historical performance, no major emission reduction was planned. In phase three of the EU ETS, with auction of emission allowances and the EU Parliament’s decision to withhold emission allowances from the market, there will be more reduction of emissions. On the contrary, the first two phases have succeeded in making managers incorporate greenhouse gas emissions in their business decisions (EU, 2010; Schiller, 2011). Although allocation of emission allowances could have been more ambitious (also due to the economic crisis), it did reach its political goals. It also reached its goals in absolute terms. Although the emission reductions also had other reasons than the EU’s cap-and-trade scheme, the reduction still occurred. To state that the EU ETS has failed, is therefore highly debatable.
More flexibility would have been good to achieve its full economic potential, though. The EU ETS’ success is still to be seen, but countries like China and the USA should not be afraid to implement their own emission trading scheme. They should learn from the EU’s starting problems and implement ambitious emission trading schemes.