Lessons from the EU Emissions Trading Scheme emerge after two years.
John Woodley is a managing director at Morgan Stanley. Contact him at John.Woodley@morganstanley.com. The views expressed here are his own.
Despite assertions to the contrary, the European Union Emissions Trading Scheme (EU ETS) is working. Industry has changed both short-term behavior and longer-term plans to reduce compliance costs—the driving down of greenhouse-gas emissions being the intended and achieved result. In this article, we review examples of the ETS affecting both planned and actual behavior. The other side of the coin is how regulatory and political uncertainty undermines this. We also note how forward market prices can deviate from expectations of future spot prices, how the market’s design caused this, and how it could be avoided. We believe that despite any criticism, cap-and-trade is easily the most cost-effective method of achieving societal environmental goals and the issues presented so far may be addressed readily.1
The European ETS was set up to achieve compliance with European commitments to reduce emissions under the Kyoto greenhouse gas treaty. In operation for almost two years now, and covering only a subset of those industries producing greenhouse gases (GHGs), its success is driving calls for expansion to cover other sectors within the EU.