Emissions Trading in the European Union

Recent discussions in the United States have raised questions about the performance of the European Union’s Emissions Trading System (ETS). Some argue that this cap-and-trade system has not significantly reduced greenhouse gas emissions, has conferred windfall gains on firms receiving free allowances, and has resulted in carbon prices that are too volatile.

A May 2008 Pew Center analysis by two leading experts on the design and implementation of emission trading regimes reviewed the initial phase of the ETS and directly addressed these issues. Noting that the initial period (2005-7) was a trial period with the goal of developing the necessary infrastructure for successful trading, the study concluded that given the start-up challenges, “the system has performed surprisingly well.” The European Union has since adopted new rules to strengthen the system and ensure steeper emission reductions.