Decreasing the number of allowances strengthens EU emissions trading

13.06.2012

In order for the European Union Emissions Trading Scheme (EU ETS) to strengthen its role within climate protection, the EU has to reduce the surplus of emission allowances. To this end, the European Union should decrease the quantity of emission allowances by at least 1.4 billion and lower the long-term emission cap from 2014 onwards.

These are the key recommendations of a recent report conducted by Oeko-Institut, which analysed the reasons for the current surplus of emission allowances on behalf of Greenpeace and WWF Germany. The report also presents different options for reducing this surplus and discusses the expected price effects on the carbon market.

Realistic prices for pollution rights

To a large extent the EU has already fulfilled its greenhouse gas emission reduction targets for 2020. At the same time there is a high quantity of emission allowances on the market, which means that the prices for the allowances are at an all-time low. The price of a tonne of CO2 currently amounts to approx. 6.50 Euro – it does not, therefore, offer any incentive for companies to invest in climate-friendly technologies. 
The main reasons for this are huge entitlements for the use of external emission reduction credits from the Clean Development Mechanism (CDM) and Joint Implementation (JI) as well as the long-term impacts of the economic crisis. The surplus arising from the promotion of renewable energies on the basis of instruments outside of the EU ETS only plays a secondary role in this price trend.

Improving the EU Emissions Trading Scheme

If the EU was to set aside a large quantity of emission allowances – approx. 1.4 billion – and at the same time decrease the cap, additional targets for reducing greenhouse gas emissions can be realised. In this way lowering the cap by 2.6 per cent a year, which corresponds to a 25 per cent reduction target, can increase the carbon price by up to 17 Euro by 2020. Decreasing the cap by 3.9 per cent annually – which roughly corresponds to a 30 per cent target – can increase the carbon price by over 20 Euro up to 2020.

A model scheme for emissions trading internationally

The European Union Emissions Trading Scheme (EU ETS) is a central pillar of EU climate policy and has developed over the years into a model scheme for a number of emission trading schemes internationally (e.g. in California, Australia, South Korea and China). In order for the instrument to be able to retain its role as a key element of EU energy and climate policy, structural changes – such as those outlined in this report – are essential.

“Strengthening the European Union Emissions Trading Scheme and raising climate ambition” is written in English and can be accessed here

The report also contains a summary in German.

Contact

Hauke Hermann
Researcher in the Energy & Climate Division
Oeko-Institut, Berlin Office
Email contact

Dr. Felix Chr. Matthes
Researcher Coordinator Energy- and Climate policy
Oeko-Institut, Berlin Office
Email contact