This paper analyzes the impact of the EU ETS on CO 2 reduction in the German electricity sector. We nd an ETS-induced emission abatement which is not exceeding 6 % of total emissions with a maximum already in 2010. Thereafter the ETS has not induced additional reductions. This outcome is sub-optimal. It corresponds to the recent debate about sub-optimal performance of the EU ETS caused by excessive allowances. Following up on this we develop a unilateral exible cap to eliminate demand side eects which lead to excessive allowances. The unilateral exible cap is based on emission intensities. Using the works of Newell and Pizer (2008); Sue Wing et al. (2009) we prove in a rst step that an intensity-based emission cap is advantageous in the German electricity sector when compared to an absolute cap. An ex-post analysis shows that the amount of excessive allowances resulting from the economic crisis during the second trading period could have been signicantly lowered with a unilateral exible cap. This approach also decouples the EU ETS from a simultaneous promotion of renewable energy.