The EU Legal Frameworks - The Sustainability of Renewable Energy in Europe - page 14

The phases of the ETS market, provided by the EU Directive 2003/87/EC, are
the following:
• Phase I: pilot period which anticipated the date of entry into force of the obliga-
tions under the Kyoto Protocol, with a duration 2005-2007.
• Phase II: 2008-2012 duration, coinciding with the period of commitment of the
Kyoto Protocol.
The EU ETS represents the main element of the European Climate Change Program
launched by the EU in order to reach the Kyoto Protocol goals.
The international trade's emissions includes the buying and selling of credits
among developing and/or industrial countries to fulfill its obligations under the
Kyoto Protocol, which aims to reduce emissions through the commercialization of
carbon credits between countries in surplus and those in deficit. The EU ETS aims
to help EU member states to fulfill their obligations to limit or reduce emissions of
GHG in a cost-effective manner. The fact that the firms participating in the scheme
can buy or sell emission rights gives the possibility to reduce emissions at a lower
cost compared to the mechanisms.
With the introduction of the cap and trade mechanism of CO 2 emissions, there
have risen different platforms on which it is possible to trade emission rights. The
market for emission rights is kind of over-the-counter (OTC) market, that is, it does
not apply obligation to concentrate trading in a single market regulated and super-
vised by a public authority; the creation and management of a market is left to the
business venture. Despite this, the greatest concentration of trade took place on the
UK market ECX (European Climate Exchange) in which, for instance in 2009, they
focused as much as 88 % of the total volume traded.
On the ECX market, there are two types of stocks that are traded: the European
Union Allowances (EUAs) and certified emission reduction (CER). Both stocks
give the right to emit 1 t of CO 2 , but differ in their origin and their usage limits:
• EUAs are rights to emit CO 2 resulting from the allowances allocated to indi-
vidual firms by national governments with the preparation of the NAP of each
phase.
• CER are rights whose origin is external to the quotas allocated by governments
with the NAP; these credits are earned in CDM projects.
Emission allocation mechanism involves at around 50 % of the total CO 2 emissions
in Europe; within the EU ETS, electricity market plays an important role. There is
no consensus among scholars on the economic impact of the ETS scheme on indus-
tries related to such allocation, especially on the effects of the emission trade system
both on the performance and strategies of the firms involved. Grubb and Neuhoff
( 2006 ) show that the CO 2 allocation scheme might generate distortion mechanisms
in users decisions; however, electricity market seems to be the only with a posi-
tive balance due, on the one hand, to the market power (electricity market has low
competition at international level). On the other hand, CO 2 allowances might reduce
generation costs since users who have a choice may be willing to diversify their
portfolio energy mix. The empirical literature is inconclusive on the extent of ETS
prices on electricity prices.