Abstract of PhD Thesis

The European Union Emissions Trading Scheme (EU ETS) – A Contribution towards understanding allowance, allocation, markets and performance and operation in a small open economy

Luke Redmond (2006) - University College Dublin

The European Union (EU) is now the proud owner of the World’s first transfrontier emissions trading scheme. On the 1st of January 2005 the European Union Emissions Trading Scheme (EU ETS) officially commenced operation of a three-year pilot phase. Initially (2005 – 2007) the scheme will only cover carbon dioxide (CO2) emissions from large emitters in the heat and power generation industry and in selected energy intensive industrial sectors in all 25 Member States. The EU ETS is essentially a by-product of the 1997 Kyoto Protocol. Under the Kyoto Protocol the EU committed itself to reducing greenhouse gas emission levels to 8 per cent below 1990 levels by the first Kyoto commitment period (2008-2012). As part of its strategy to realise its Kyoto Protocol target in a cost effective manner the EU developed a Union wide emissions trading scheme. It is estimated that the sources to which the trading scheme applies will account for 45 per cent of carbon dioxide emissions in 2010, and 30 per cent of total greenhouse gas emissions in that year (European Commission, 2005). In developing an emissions trading scheme the process of allowance allocation is central to the operationalisation of such a scheme. Allowance allocation represents the distribution of the official unit of the trading scheme amongst participants. Allowance allocation is one of the most controversial aspects of emissions trading design since allowances are valuable assets and their distribution has important implications for both efficiency and equity concerns of any emissions trading scheme. In addition, trading scheme participants, administrators, economists and environmentalists will all have a preference for how they are distributed. In the EU ETS allowance allocation amongst the scheme’s participants was achieved via the National Allocation Plan (NAP) process. Given the importance of the allocation process and the sheer size of the EU ETS (~11,500 participating installations), the EU ETS provides a unique opportunity to undertake a policy analysis of the allocation process across Member States. Associated with the development of the EU ETS has been the development of the allowance market. While the allocation process was central to the operationalisation of the EU trading scheme it was essential for the development of the allowance market because it simultaneously created the potential supply of and demand for allowances in the emissions trading market. With approximately 11,500 installations participating in the trading scheme and some 6.2 billion allowances allocated amongst them the EU ETS represents the World’s largest emissions market. With carbon now established as a legitimate traded commodity, the question of interest is what are the factors that have determined the price of carbon to date and what factors are likely to determine the price of carbon in the future.