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    Emissions trading in the EU an awkward dilemma

    The EU Emissions Trading Scheme (EU ETS) may have encouraged EU member states to comply with the Kyoto Protocol and contributed to growth of the global CO2 trade market, but there is still plenty of room for improvement.

    According to Deputy General Director of Dansk Energi, Lars Aagaard, the cost of CO2 emissions will decide whether or not the European Member states become energy pioneers. This has been a key point of dispute since the first phase of the scheme, that encourages the EU-states to share the burden of reducing the emission of CO2.

    Over-allocated permits

    Deciding how much each member state was allowed to emit was one of the most serious problems facing the first period (2005-2007) of EU ETS. A non-transparent and decentralized allocation process at national level overestimated the amount of CO2 emission from industry.

    According to an analysis from European Environment Agency, over-allocated permits resulted in European member states not only reducing the amount of CO2 emissions by 3% less than the allocated amount, but also the cost of CO2 quota to be plunged by 1 euro per ton in July 2007.

    The risk of auctioning

    The EU Commission suggested the implementation of centralized allocation at EU level and to auction the entire quota in the Third phase 2013-2020. However, auctioning the quotas could risk moving European heavy industries and jobs off shore, as it may increase the cost of CO2 quota.

    Uncertainty in the price

    The unstable cost of CO2 quotas is a fundamental problem, making it hard to predict the price of emissions. According to a report from the Faculty of Economics at the University of Cambridge , it could lead to delayed investment decisions. Furthermore, risk aversion by price uncertainty is likely to reduce investment.

    Stability versus competition

    Is there any solution? Frede Hvelplund, a professor of Aalborg University suggests ‘Efficiency Quotas’ which link the cost of CO2 quotas with emissions per kilo-watt hour. The significant point in his suggestion is a fixed cost which is reduced every year.

    In this case, it is possible to keep the cost of CO2 quotas stable, without being affected by external economic circumstances, whilst still correctly verifying the amount of emissions. On the other hand, the original purpose of the EU ETS promoting competition in the area of environment will be obstructed. EU ETS taking the leading position in the global CO2 emissions trade policy has come to a deadlock.

    By Hyosang Lee

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