The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results

TLDR

The EU ETS is the world’s first large‑scale emissions trading system for CO2 and is expected to serve as a model for future global regimes. This paper examines the allocation of allowances—how the limited CO2 emission rights are distributed among participants. Allowances were allocated through a process that faced data shortages, varied member‑state choices on auctioning, benchmarking, and new‑entrant rules, and required decisions on distributing expected shortages. The analysis shows over‑allocation, trading patterns, and abatement, highlighting that CO2’s unique characteristics and non‑economic factors shape allowance allocation.

Abstract

The European Union Emissions Trading Scheme (EU ETS) is the world's first large experiment with an emissions trading system for carbon dioxide (CO2) and it is likely to be copied by others if there is to be a global regime for limiting greenhouse gas emissions. After providing a brief discussion of the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the U.S., this paper focuses on allowance allocation—the process of deciding who will receive the newly limited rights to emit CO2. We describe how allowances were allocated in the EU ETS, with particular emphasis on the issues and problems encountered, including the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of Member States with respect to auctioning, benchmarking, and new entrant provisions, and the difficult issue of deciding to whom the expected shortage was to be allocated. Finally, we discuss the recently available data on 2005 emissions and what they indicate concerning over-allocation, trading patterns, and abatement. We conclude with some observations about the broader implications of the EU ETS, what seems to be unique about CO2, and the fact that non-economic considerations inform the allocation of allowances.