Evaluating the EU Emissions Trading System - Take it or leave it? An assessment of the data after ten years - Grantham Briefing Paper 21

Authors: Mirabelle Muûls, Jonathan Colmer, Ralf Martin, Ulrich J. Wagner 

Headlines

• Since 2005, the European Union (EU) has been running a carbon market to govern the greenhouse gas emissions from 12,000 power and manufacturing plants in 31 countries.
• This has led to a reduction in industrial carbon emissions.
• It has had no detrimental effects on economic performance.
• The scheme has been partly responsible for the increase in low-carbon 'cleantech' innovation since 2005.
• The detailed design of a carbon market affects its impact on the risk of carbon leakage and the incentives it creates for cleantech innovation.
• While there are opportunities for further improving the EU Emissions Trading System (ETS), evidence suggests that it is worthwhile maintaining and developing this landmark policy.
• As an alternative policy, a carbon tax would provide more certainty and visibility for low-carbon business, therefore it should remain a potential tool for policymakers.

Introduction

Since its inception in 2005, the EU ETS has changed the way that business is conducted in Europe by establishing a monetary value for the right to emit greenhouse gases that cause climate change.

The scheme aims to limit and reduce greenhouse gas emissions from more than 12,000 power and manufacturing plants in 31 countries, which together account for around 45% of the EU’s greenhouse gas emissions (5% of global emissions). It is administrated by the European Commission (EC).

Critics argue that stringent climate change policies in EU countries, without similar action in other countries, can only lead to a loss of competitiveness in global markets, with no real impact on global emissions (see box 2).

Carbon- or emissions-trading is a market-based policy instrument that is designed to reduce emissions with minimal cost to society, while stimulating technological innovation to further reduce this cost in the future.

Now, as new carbon markets emerge around the world, evidence about the impact of the EU ETS and a thorough understanding of how it affects companies’ behaviour, will be essential to policymakers.

This is a summary of the impact of the EU ETS on environmental and economic outcomes such as carbon dioxide (CO₂) emissions, economic performance, international competitiveness and innovation.

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