The European Union’s Emission Trading System (EU-ETS) is currently the world’s largest market for trading greenhouse gas (GHG) emission allowances (also referred to as permits or credits), and is the EU’s ‘flagship’ climate change mitigation policy. However, in its first eight years the EU-ETS has not been the driver of domestic EU climate change mitigation that was originally envisaged. An estimated oversupply of 2billion emission allowances within the system has contributed to a ‘carbon price’ (the value of emission allowances in €/tCO¬2) that has been too low to stimulate the anticipated investment in domestic emission reduction measures.
Furthermore, some claim that the oversupply of free allowances and the high volume of offsetting in the first two phases of the EU-ETS are undermining other mitigation measures within the EU. This briefing note describes the EU-ETS and the problems that have emerged in the first and second phase. It also reviews current actions within the EU, and future options that are available, to correct these issues for the third phase.