European Union Emissions Trading System (EU ETS)

The concept of emissions trading is deceptively straightforward. However, designing and implementing a successful ETS has proven quite difficult. The EU ETS, despite its teething problems, continues to be the largest and most successful example of such a system. Although some inefficiencies remain, the EU has resolved various key implementation problems and has been unrelentingly ambitious in its expansion and application of the EU ETS.

However, as the EU’s climate and environmental goals expand, there is a danger of assuming that the EU ETS can help to achieve them all. Emissions trading systems are good at achieving cost-effective emission reductions, but they are often presented or viewed as being capable of achieving many secondary goals as well, such as technological innovation. While low-carbon innovation may occur under a cap-and-trade scheme, it is not its main aim and arguably its functioning should not be judged by this standard.

Similarly, the EU ETS’ role in addressing inequities between the Member States in terms of economic development and climate mitigation costs remains a source of dispute. The EU ETS is part of a larger regulatory context in which many compromises have had to be made in order to align interests of high- and low-income Member States. With the increased ambition levels expressed in the Green Deal, these controversies, and the resulting compromises, are set to continue to play an important role in the EU ETS’ development and implementation.