The EU Emissions Trading Scheme and carbon pricing

Published: 23/02/2010

One effect of the recession has been that the price at which carbon allowances within the EU ETS are traded, while relatively stable, is lower than many would have liked.

This perceived "failure" of the scheme has led to calls for the cap to be tightened and/or for some form of floor price to be imposed. There have also been allegations that manufacturers, whose output has been severely impacted by the recession, have enjoyed "windfall profits" by selling allowances they no longer need.

This background briefing document examines these claims from the steel industry's standpoint.

The EU Emissions Trading Scheme was designed to deliver a given level of emissions reduction at the lowest economic cost. It was not designed to deliver a given carbon price at the level needed to incentivise investment in any specific technology.

The EU ETS will deliver with complete certainty this pre-determined environmental outcome. Emissions have been and will continue to be capped - and at an ever lower level.

For any sector, the largest determinant of the level of emissions is the level of output.

It would be economically illogical to reduce the cap in line with the recession-induced reduction in output unless the cap were to be similarly flexed upwards as output increases. However that approach has been consistently rejected by legislators and NGOs.

Artificially increasing the EU ETS carbon price would undermine its economic effectiveness - the same level of emissions reductions would be achieved (i.e. the cap), but at a higher cost. The EU ETS should not be over-burdened with expectations of delivering investment in specific technologies. If the costs of such technologies are higher than the marginal abatement cost set by the current carbon price, then alternative means of incentivising the required investment should be found.

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