IETA | International Emissions Trading Association

April 11, 2012

I. Background

The price of an EU ETS allowance (EUA) is not bound by any price floor or ceiling but is based on price discovery regarding supply and demand in markets. The price fluctuates in line with market participants’ view of supply and demand. There is no tool foreseen for short-­term market intervention by the regulator under Directive 2003/87/EC (ETS Directive). The only form of addressing a divergence from underlying economic factors is by adjusting market supply, i.e. the emission reduction objective or the ‘cap’.

EU ETS & Aviation

Background

In 2005, European Union (EU) policy makers turned their attention on regulating emissions from the aviation sector. Although aviation only accounted for 3% of global carbon emissions in 2009, the industry’s carbon footprint has increased by 98% between 1990 and 2006.¹  Due to an emissions growth forecast of 667% from 2006 to 2050, the sector stands to become a more important source of GHG emissions in the future unless mitigation policies are being taken.

Why Emissions Trading is More Effective than Command and Control

Cap and trade systems and command and control regulation both involve the limiting of emissions in polluting sectors of the economy. However, cap-and-trade provides economic incentives for private sector actors to engage in mitigation, thereby making it the most efficient method of achieving an environmental target. Cap-and-trade is already the policy instrument of choice in many U.S States, the EU and Australia, and has proven to be effective in the U.S Acid Rain Program.

The principal advantages of emissions trading are:

Voluntary Markets For IETA

The voluntary carbon market includes any sectors and geographies not covered by mandatory cap-and-trade schemes or other regulation of greenhouse gas (GHG) emissions. Individuals, companies and governments purchase carbon offsets to mitigate their own greenhouse gas emissions, to cover some or all of their carbon footprint for particular activities or businesses, or just to display their concern for the environment.

In 2010, suppliers of offset services transacted a conservative estimate of 131 MtCO2e (1). In a period of economic recession and political uncertainty, this figure is a positive reflection of the growing interest in climate/carbon finance. The market grew by 34% ⁽²⁾ last year and is predicted to steadily increase post 2012.

The EU's Emissions Trading System

The European Union cap and trade system is the most developed in the world and will become progressively tighter and more comprehensive as the decade progresses.

The EU’s emission trading scheme (ETS) - kicked off in 2005 and, following an initial pilot phase, now in its second phase - is the most ambitious of its kind in the world. It covers about 12.000 installations in 30 countries(1) and 41% of the EU’s CO2 emissions. The ETS sector includes the power and heat generation sector, combustion plants, oil refineries, coke ovens, iron and steel plants and factories making a.o. cement, glass, lime, bricks, ceramics.

Why Emissions Trading is More Effective Than a Carbon Tax

A cap and trade system is the best means to establish a quantifiable, legally enforceable limit on emissions which will ensure that essential climate change targets are met at the lowest possible cost. Such a program, when combined with offsets, will accelerate global emissions reductions. In addition, cap and trade provides the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth. Cap-and-trade is already the policy instrument of choice in many US States, the EU, New Zealand and Australia, and has proven to be effective in the US Acid Rain Program.

Advantages of emissions trading are:

Emissions Trading and the WTO

Over the past decade, the linkages between environmental protection and international trade have come to the forefront of eco-political discourse. Increasingly, politicians, civil society and individual consumers have been forced to acknowledge the trans-boundary nature of environmental degradation vis-à-vis the emergence of acid rain, ozone depletion, and most recently, climate change.

However, classic collective action problems undermine the efforts of international environmental agreements to mitigate the negative externalities stemming from increased consumption, production and trade. Free riders make it difficult to enact effective agreements and “leakage problems” may encourage production and associated pollution to switch to unregulated economies. In a “race-to-the-bottom” some governments have lowered environmental standards to attract internationally mobile capital and to gain a comparative advantage in world trade.