The EU ETS as an Environmental Instrument - Green Energy and Efficiency: An Economic Perspective - page 353

show a surplus, with no possibility of carrying over any allowance to the next
period ( 1 in 2007. EUAs stayed at that level for

the rest of the period. Yet futures prices for Phase II remained at

“ banking ” ) the price fell to below €

20.
For Phase II the limitations found in Phase I were changed. The two key changes
involved the process to build up the market cap:

€ 15

-

rst, allocations to facilities were
assessed by the European Commission rather than by Member States. Second,
allocation was to be based on veri ed emissions in the previous period

(2005 2007). Both measures sought to support the robustness of carbon prices.

However all efforts to adjust the scheme failed due to the scale of the economic
downturn just as Phase II entered its earliest stages.
During the

-

rst half of 2008, high energy prices (with crude oil peaking at $147/
bbl. in July) sent EUA prices rocketing to 30. However the lack of industrial

activity due to the economic downturn had a major impact on demand for EUAs.
This effect made it unnecessary to buy EUAs to assure compliance. Therefore many
carbon players saw the massive selling of EUAs as an easy way to generate rev-
enues and improve their cash

€

ow.
Prices dropped from more than € 30 to € 8 in just 5 months. However, although

€

they rose to around 15/t in 2011, eventually the surplus built up was so important

that the price collapsed to

€

5/t at the end of Phase II.
Across the next sections of this chapter the key features of the cap-and-trade
systems will be reviewed. From the starting point of generating an external price
signal for CO 2 , carbon tax and carbon markets schemes are analysed detailing the
pros and cons of both mechanisms. An Emissions Trading Scheme, and as such
generating a price signal for carbon through establishing and stringent cap, was the
choice of the EU regulators. European Scheme main design parameters like size of
the cap, allocation methods and use of offsets are studied and the impact of demand
drivers and market participant s assessed. Thus the revision of the EU ETS, from

the very foundation of it across its key elements, all in the European economic and
industrial environment of the past nine years, will lead us to the answer to the most
important question. Is the EU ETS delivering the results it was design for?

'

2 Internalizing the Cost of Carbon

One of the main obstacles in the ght against Climate Change is the inability of the

market to assign a value to the atmospheric assimilation of a greater amount of
greenhouse gases (GHG). Industries and other GHG emitters do not feel the impact
in their accounts of the inability of the atmosphere to assimilate emissions unlim-
itedly. This lack of a price signal means that there are no natural incentives in the
balance of supply and demand for operators to reduce their emissions.
Lawmakers may use two main tools to solve this problem and create an arti cial

price signal: a carbon tax, or a CO 2 market. A carbon tax provides CO 2 emission
reductions and provides clear information to emitters about the future cost of their
emissions, but there is no such clarity as to the total amount of reductions that will