The EU ETS as an Environmental Instrument - Green Energy and Efficiency: An Economic Perspective - page 364

From this relative long term perspective, this chapter has reviewed the key
design features of any cap-and-trade scheme, and speci cally the EU ETS

characteristics.
Internalizing the carbon cost through an external price signal, and providing a
strong and scarce message to the market have revealed as the main important factor
for the success of the system [ 8 ].
EU ETS started with the uncertainty of the veri ed level of emissions and the

cient level of scarcity and
thus the prices were depressed. During second phase (2008

rst phase (2005 2008) was strongly affected by an insuf

-

2012), the cap was set

-

based on historical veri ed emissions and the price signal was powerful during the

rst months. But the world economic crunch impacted the level of industrial
activity in Europe dramatically. Once again the system found itself in an excess of
allowances scenario, a very important surplus started to build up and the prices
plummeted again. The Phase III started in 2013, strongly affected by the surplus in
the market and with new rules trying to reinforce the long term signal. However so
far the credibility of the system is still at stake and EU ETS operators do not feel the
urge to reduce their emission since they feel comfortable with their excess posi-
tions, even in the long run.
So it is fair to say, analysing what has happened, that EU ETS has worked
properly in a technical way. The market price for CO 2 has been the answer to the
supply and demand balance, experiencing high prices during the few moments
when the market feel that the allowances were scarce and low prices when the
market participants sense the excess of allowances and therefore the urge to reduce
emissions.
However the system has failed providing the needed level of scarcity to produce
the price signal that boosts clean technologies and emissions reduction. Some can
argue that the 21 % emissions reductions in 2020 compare with 2005 goal for the
EU ETS sectors will be ful

l, but the reasons that triggered the reduction are not
those intended by the regulator and the price has not justi ed the investment on low

carbon technologies [ 9 , 12 ].
There are several reasons to explain why the level of scarcity has been inap-
propriate; uncertainties on the veri

rst
years, low industrial activity due to the economic crisis which has resulted in low
demand both for

ed emissions of EU ETS sectors during the

nal goods and electricity, overlapping effects with other Euro-
pean policies like Renewable Energy and Energy Ef ciency Directives, excessive

usage of international credits in an already oversupply market, inef

ciencies related

to the distribution of free allowances to prevent carbon leakage.
But beyond all these side effects underlines the true fact that the supply, or cap,
is not resilient to socks or signi cant changes in demand. The cap is set by the

regulator following a path to achieve the emissions reductions desire, and not taking
into account the capacity or the effort needed by the operators to produce this
reduction. Therefore the level of ambition has signi

cant different implications if
allowance demand is healthy and installations would prefer emissions reductions at
a lower cost than buying them in the market, or on the contrary in a situation with