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The EU Emissions Trading System

Lucas Merrill Brown, Alex Hanafi, Annie Petsonk
The EU ETS has been established and extended over three successive phases: Phase I (2005–2007, often called the “pilot phase”); 
Phase II (2008–2012); and Phase III (2013–2020). The EU appears to be on target and in fact ahead of schedule for achieving the ambitious emission reduction target set for the years 2008–2012, in large measure because of the success of the EU ETS. As with any innovative policy measure, the EU ETS has stumbled in places, and policymakers should understand the lessons learned from its faults and subsequent reforms. For instance, because EU governments based the system’s initial caps and emissions allowance allocation on estimates of regulated entities’ emissions rather than on actual historical emissions data, governments issued too many emissions allowances (“over-allocation”).Now, however, caps are established on the basis of measured and verified past emissions and best-practices benchmarks, so overallocation is less of a problem. 
One central finding from seven years of experience with the EU ETS has emerged: Despite initial dire warnings that the ETS would impede economic growth by dramatically increasing costs to consumers and industry, the evidence shows that the ETS has played a significant and successful role in reducing the EU’s global warming pollution at costs a fraction of 

those predicted. 
The EU ETS is working. Most importantly, it is working now—on the ground and in the atmosphere. It is proving itself a practical, efficient way to spur innovation and reduce greenhouse gas emissions. In addition to driving emission reductions, the EU ETS can be seen as an economic development tool—together with other complementary policies, it has stimulated innovation in the emerging European low-carbon economy, as case studies provided in Appendix A to this report illustrate. Recent debates about the fluctuating price of emissions allowances should not obscure these environmental and economic successes. As even one commentator critical of some aspects of the EU ETS has noted, “if you are looking for a serious achievable policy, this is the best one we’ve got.”
Taking stock of the EU ETS as it prepares to enter its third phase, this report identifies six key results of the EU ETS, highlights the lessons learned from these outcomes, and provides recommendations for jurisdictions developing their own climate policies. Other regions, states, and local jurisdictions looking to decouple greenhouse gas emissions from economic growth using 
cap-and-trade systems should consider the refinements implemented over the course of the EU ETS’s development.



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