The European Carbon Market in Action: Lessons from the First Trading Period

Abstract

Through its Emissions Trading Scheme (EU ETS), the European Union is leading the world's first effort to mobilize market forces to tackle global climate change. This article, examines how the EU ETS has performed thus far, at the conclusion of the scheme's first trading phase (2005–2007). Insights drawn from this analysis may inform not only the scheme's future operation, but also the establishment of greenhouse gas trading programs outside Europe. This interim analysis finds that Phase I of the EU ETS (2005–2007) has successfully established a carbon price for significant segments of economic activity in Europe, as well as the necessary trading infrastructure and experience; that the price on carbon has so far had limited impact on the industrial competitiveness of European industry; that it has provided an important stimulus to greenhouse gas emission reductions outside of Europe, primarily through the Clean Development Mechanism; and that the EU ETS provides useful lessons for other countries seeking to limit GHG emissions and for future global climate negotiations.

Energy risk management with carbon assets

“…The determinants of CO 2 prices are indeed linked to other energy markets (brent, gas, coal), and institutional events, as highlighted in previous literature (Christiansen et al (2005), Kanen (2006), Mansanet-Bataller et al (2007), Alberola et al (2008)). Among these fundamentals, the fuel-switching behaviour of power operators, and the amendments to the scheme brought by the European Commission are key to understand the factors that drive the underlying price changes of carbon assets (Convery et al (2008), Delarue et al (2008), Ellerman and Feilhauer (2008), Chevallier et al (2009)). Last but not least, carbon assets seem to exhibit a weak link with macroeconomic risk factors, be it with industrial production as a proxy of GDP (Alberola et al (2009a), Alberola et al (2009b)), or with stock and bond indices as a proxy of macroeconomic changes (Chevallier (2009)).…”

Climate Change: A Comparison Of Market-Based Instruments From A South African Perspective

“…An interim analysis of Phase I of the EU ETS confirms that the first phase had little impact on industry competitiveness (Convery et al, 2008). Table 3 below summarises the GDP per capita information (adjusted for current prices) for each EU ETS country in the period 2005 to 2009.…”

“…From a review of the above tables it is clear that the EU ETS was more effective in Phase II than in Phase I. It is, however, argued that Phase I not only established a carbon price for material sectors of economic activity in Europe, but also established the necessary trading infrastructure (Convery et al, 2008). Furthermore, during Phase I, the permits allocated were also found to be consistently higher than the actual verified emissions taking place in the EU ETS countries (Gilbertson & Reyes, 2009 …”

Environmental prices, uncertainty, and learning

“…Many of the early teething problems have been overcome (for an assessment of the early ETS experience, see Convery, Ellerman et al 2008). The market is liquid, with several million tons of carbon traded every day.…”