The EU ETS as an Environmental Instrument - Green Energy and Efficiency: An Economic Perspective - page 352

These criticisms have become louder in recent years as energy costs, and domestic
debates about them, have increased. 1
Through the so-called [ 11 ], 2 the EU

made its commitment to work against Climate Change one of its four chief prior-
ities in energy policy, the other three being energy supply security, economic
competitiveness and the promotion of technology and employment.
As the mainstay of its strategy to combat climate change, the EU launched
emissions trading (EU ETS, European Trading Scheme) in 2005. 3 The

“ 20-20-20 Climate and Energy package ”

rst period

(2005 2008) of EU ETS could be considered as a trial of how a market based

mechanism could be implemented in the EU. It covered around 12,000 facilities and
emissions equivalent

-

to almost 40 % of the EU total. The second phase

(2008 2012) was extended to EU27 and Norway, Iceland and Liechtenstein and

was designed to improve the system.
In Phase I of EU ETS (2005

-

2007), 4 European Union Allowance (EUA) prices

-

started out at around 30 in 2006. This sharp rise was a conse-

quence of uncertainties regarding the stringency of the cap and the shortage of
allowances. These fears of scarcity were due to the power generation sector
switching from gas to coal, pushed by rising gas prices. Only the power sector was
trading in the EU ETS and it was assumed that there was a shortage in the market
until the information on 2005 emissions was published. Since the data showed
lower emissions than expected, and therefore a smaller expected decit, EUA prices
plummeted quickly to

€ 7 and surpassed €

€ 10. As it became clear that the balance of the market would

1 However, the EUTS is not the only carbon market approach which is facing hard times. After
the Warsaw Conference of Parties (COP) to boost international carbon markets there was little
development. The nal text on the pathway to a climate deal in Paris does not specify any role for
markets. Developing nations were opposed to this. As Flynn [ 2 ] states: ) talks on a new market

mechanism were discontinued. They will be reconvened next year in Lima, Peru. And discussions
on a

“ ( …

the means by which carbon pricing systems
worldwide could be linked — were also postponed ( … ) ” .
2

“ framework for various approaches ” (FVA) —

The climate and energy package is a set of binding legislation which aims to ensure that the
European Union meets its ambitious climate and energy targets for 2020. These targets, known as
the “ 20-20-20 ” targets, set three key objectives for 2020: rst, a 20 % reduction in EU greenhouse
gas emissions from 1990 levels; second, raising the share of EU energy consumption produced from
renewable resources to 20 %; and third, a 20 % improvement in energy efciency in the EU [ 11 ].
3 Two further Directives were enacted by 2009 to cater for the goals established in the climate and
energy package: the Renewables Directive and the Fuels Quality Directive. A few years later, in
2012, another Directive was passed to deal with more issues related to energy efciency. Although
all these pieces of legislation deal in principle with different facets of the same problem and set
different targets, the truth is that in practice they overlap various ways that affect the carbon price.
For instance, the new Energy Efciency Directive was passed with the praiseworthy objective of
stimulating energy ef ciency in diffuse sectors by promoting energy ef ciency measures among end
users, However the original draft, released in 2011, included power generation and re ning, which
were already covered by the EU ETS Directive, and caused a dramatic fall in carbon prices due to
overlapping targets and the uncertainty created around the EU ETS Directive in the market [ 14 ].
4

anxious to
have a window of experience from which to learn and which would inform later stages of the
trading scheme ” .

Phase I was a learning-by-doing period implemented by the European Commission “