How to make EU emissions trading a success

The emissions trading scheme currently in place in the EU has “fundamental flaws”, writes Simon Tilford, chief economist at the Centre for European Reform (CER).

The October paper argues that this is because the EU emissions trading scheme (EU-ETS) “lacks a strong and independent authority to allocate emissions caps to the member states”, as well as administer the short timeframes required by the EU-ETS. 

Although the EU is proud of having set ambitious targets to limit greenhouse gas emissions, “the hard part will be putting in place policies to meet them”, Tilford argues. 

To this end, the author proposes establishing new and independent institutions to run and oversee the market: 

A European Environmental Board to distribute national emissions caps to the EU-27, allocate emissions permits under the trading scheme, carry out the auctioning of emissions permits and establish strict guidelines for the use of auction revenues. 

A European Carbon Market Authority, which would be a fully-independent, EU-wide regulatory body to oversee the carbon market. 

Tilford also suggests: 

Setting emissions targets to 2050, arguing that timeframes have to be more compatible with the investment cycle of the main industries covered by the EU-ETS and provide a strong signal that investment in clean technology will be rewarded over time. 

Full auctioning of emissions permits to reduce the relative cost of clean technologies and prevent companies such as energy generators earning “windfall profits” from the scheme. 

His paper argues that the EU “will miss a big opportunity if it fails to address the institutional flaws that threaten to hold back” its carbon market. 

Tilford highlights “real grounds for optimism that the US will establish a federal emissions trading scheme within the next three years”, and claims these rapid developments are “largely unnoticed in Europe”. 

He concludes that the EU should link its scheme with a future US one, and that failure to do so “would set back the drive to establish a global carbon market”. 

Read the full paper here.