Background
The EU Emissions Trading Scheme (EU ETS) is a major element of the European Union’s policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively.
Historical Context
The EU ETS was established in 2005, marking the start of the world’s first and largest carbon market. The initiative reflected a broader effort by the European Union to transition to a lower-carbon economy, aligning with the Kyoto Protocol targets. The scheme has gone through significant changes across different phases:
- First Phase (2005-2007): A pilot phase, focusing primarily on building the necessary infrastructure and institutions.
- Second Phase (2008-2012): Implemented along with the Kyoto Protocol compliance period, bringing tighter caps on emissions.
- Third Phase (2013-2020): Introducing a single EU-wide cap, auctioning a larger proportion of allowances.
- Fourth Phase (2021-2030): Tailoring further reductions to meet the EU’s more stringent climate targets set for 2030.
Definitions and Concepts
EU Emissions Trading Scheme (EU ETS)
The EU ETS sets a cap on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. Companies receive or buy emission allowances which they can trade with one another as needed. One allowance gives the holder the right to emit one tonne of CO2(/or the equivalent amount of another greenhouse gas).
Emission Permits
Certificates that provide the allowance to emit a specified amount of greenhouse gases. These are initially distributed to installations by the national governments and can be freely traded to ensure cost-efficient emissions reductions.
Greenhouse Gas Emissions
Emissions of gases like carbon dioxide (CO2) and methane (CH4), which trap heat in the atmosphere, contributing to global warming and climate change.
Major Analytical Frameworks
Classical Economics
From a classical viewpoint, externalities such as emissions are not priced in the market. The EU ETS could help internalize these external costs by making the emitters pay for their pollution, leading to a more efficient allocation of resources.
Neoclassical Economics
Neoclassical theory would argue for minimizing abatement costs. The flexibility of the trading system ensures that emissions reductions are achieved at the lowest cost across the economy.
Keynesian Economics
Keynesians would focus on the potential economic stimuli driven by the trade of permits, including investments in greener technologies and innovations, reducing long-term economic instability caused by environmental degradation.
Marxian Economics
From a Marxian perspective, the trading scheme may be critiqued as commodifying the atmosphere while favoring capital interests, potentially without sufficiently addressing the underlying causes tied to capitalist production.
Institutional Economics
Institutional economists study how the rules, agility, and governance mechanisms within the EU ETS contribute—or fail—to foster compliance, reduce emissions efficiently, and adapt to evolving economic and environmental contexts.
Behavioral Economics
Behavioral economics would examine how market participants respond to incentives within the EU ETS, including how they perceive the costs, potential benefits, and uncertainties related to trading emission allowances.
Post-Keynesian Economics
The emphasis could be on how such schemes address market failures and structures, focusing on the impacts and adjustments of real economic sectors.
Austrian Economics
Austrian scholars might critique the centralized and regulatory nature of the EU ETS viewing it as government overreach, potentially leading to inefficiencies compared to market-driven solutions.
Development Economics
For those in development economics, the scheme’s dynamics can illustrate impacts on economic performance and low-carbon development paths in both transitioning and fully industrialized economies.
Monetarism
Monetarists could focus on the cap-and-trade system’s effects on overall price levels, inflation, and the indirect impacts of fluctuating permit prices on the broader economy.
Comparative Analysis
Compared to other international carbon pricing mechanisms, the EU ETS is distinctive for its scale, comprehensive regulatory framework, and the evolving integration into broader EU climate policies.
Case Studies
Specific case studies could involve sectors like energy production in Germany or high-emission industries in Eastern Europe looking at how the EU ETS has driven technological change and emissions reductions within those contexts.
Suggested Books for Further Studies
- “Pricing Carbon: The European Union Emissions Trading Scheme” by A. Denny Ellerman, Frank J. Convery, and Christian de Perthuis.
- “Emissions Trading: Principles and Practice” by T. H. Tietenberg.
- “The Economics of Emissions Trading” by Thomas H. Jonathan.
Related Terms with Definitions
- Cap-and-Trade: A system for controlling carbon emissions by setting an upper limit on
