Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy
* The authors are Policy Director at the National Commission on Energy Policy, a professsor of economics at the University of Maryland and University Fellow at Resources for the Future, and Senior Fellow at Resources for the Future, respectively
Correspondence should be directed to pizer{at}rff.org
In 2005, the European Union introduced the largest and most ambitious emissions trading program in the world to meet its Kyoto commitments for the containment of global climate change. The EU Emissions Trading Scheme (EU ETS) has some distinctive features that differentiate it from the more standard model of emissions trading. In particular, it has a relatively decentralized structure that gives individual member states responsibility for setting targets, allocating permits, determining verification and enforcement, and making some choices about flexibility. It is also a "cap-within-a-cap," seeking to achieve the Kyoto targets while only covering about half of the EU emissions. Finally, it is a program that many hope will link with other greenhouse gas (GHG) trading programs in the future—something we have not seen among existing trading systems. Examining these features, coupled with recent EU ETS experience, offers lessons about how cost effectiveness, equity, flexibility, and compliance fare in a multi-jurisdictional trading program, and highlights the challenges facing a global emissions trading regime.
The authors acknowledge funding support from MISTRA, the Swedish Foundation for Strategic Environmental Research.