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EUROPEAN POLICY CENTRE
EPC is an independent, not-for-profit think tank dedicated to fostering European integration through analysis and debate.
Their website: epc.eu .
Jørgen KNUD HENNINGSEN
The Emission Trading Scheme is undoubtedly the world’s biggest application of an economic instrument to address an environmental problem.
When the Commission launched the ETS proposal back in 2001, the authors of the proposal explicitly aimed at making emission allowances a freely tradable ‘financial commodity’. This aim has been achieved, and CO2 prices have been reported in the Financial Times for years together with other commodities.
But unlike other commodities, the price of CO2 allowances is determined solely by demand, the supply being decided politically years in advance. The fact that CO2 allowances, again unlike other commodities, have no alternative uses or substitutes is partly to be seen as an explanation for the present malaise of the system.
The low prices of emission allowances in recent years – and most likely for at least another five or ten years to come – are mainly due to generous allocations during the 2008-2012 period, to the possibility of transferring unused allowances from the previous trading period, and to the prolonged period of economic recession.
This means that the system is now flooded with allowances, to the extent that the ETS will be virtually without impact on emission reduction for years to come.
In short, whereas the ETS in its present form may be sufficient for meeting short-term objectives, it is far from sufficient for meeting the more important longer-term needs for the de-carbonisation of the economy.
The Commission, and others, have from time to time suggested that what is really needed is a global ETS ! So far, the only ‘experiment’ in this direction, the Clean Development Mechanism in the Kyoto Protocol, has not delivered a common CO2 price.