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Study Notes

European Union Carbon Emissions Trading (EUETS)

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 3 Feb 2023

This study note summarises how the European Union carbon emissions trading system is designed to operate.

The European Union Emissions Trading System (EU ETS) is a cap-and-trade system designed to reduce greenhouse gas emissions in the European Union (EU). The EU ETS covers approximately 45% of EU greenhouse gas emissions, including emissions from power generation, industry, and aviation.

Under the EU ETS, the European Commission sets a cap, or limit, on the total amount of emissions that can be produced by the participating sectors. Companies in these sectors are then issued allowances, which represent the right to emit a certain amount of CO2.

Each year, companies must surrender enough allowances to cover their emissions for that year. If a company emits less than its allotted amount, it can sell its surplus allowances to another company that has exceeded its limit. This creates a market for emissions allowances, where the price of the allowances is determined by supply and demand.

The EU ETS aims to create an economic incentive for companies to reduce their emissions by making it more expensive to emit CO2. By putting a price on carbon emissions, the EU ETS aims to shift the burden of reducing emissions from the public to the polluters, promoting a transition to a low-carbon economy and reducing the impact of climate change.

In conclusion, the EU ETS is a market-based system that aims to reduce greenhouse gas emissions by putting a price on carbon emissions and creating an economic incentive for companies to reduce their carbon footprint. The EU ETS covers a significant portion of EU emissions and is one of the largest and most comprehensive carbon markets in the world.

What have been some of the criticisms of European Union Carbon Emissions Trading?

The European Union Carbon Emissions Trading System (EU ETS) has faced a number of criticisms since its introduction in 2005. Some of the most common criticisms include:

  1. Allocation of allowances: Critics argue that the initial allocation of allowances was too generous, resulting in low carbon prices and little incentive for companies to reduce emissions.
  2. Lack of ambition: Some argue that the EU ETS does not do enough to reduce emissions, as the cap has been set too high and the annual reduction rate is too slow.
  3. Ineffectiveness: Critics claim that the EU ETS has failed to deliver significant reductions in emissions, as the carbon price has remained low and companies have been able to pass on the cost of allowances to consumers.
  4. Complexity: The EU ETS is a complex system that is difficult to understand and administer, leading to issues such as fraud, misuse of allowances, and a lack of transparency.
  5. Carbon leakage: Some argue that the EU ETS has led to carbon leakage, where companies move their emissions-intensive operations to countries with less stringent regulations, resulting in a net increase in emissions.
  6. Distributional effects: The EU ETS has been criticized for its distributional effects, as the cost of allowances is passed on to consumers in the form of higher energy prices, disproportionately affecting low-income households.

In conclusion, the EU ETS has faced criticism for a range of issues, including its allocation of allowances, lack of ambition, ineffectiveness, complexity, carbon leakage, and distributional effects. Nevertheless, the EU ETS remains a significant policy tool for reducing emissions in the EU and continues to evolve and adapt in response to these criticisms.

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