European Union – Emissions Trading System (EU-ETS): A Deep Dive into Pricing and Lessons Learned

The European Union – Emissions Trading System (EU-ETS), since its inception, has been a benchmark in showcasing how nations can tackle the ever-pertinent issue of climate change collectively. Let’s delve into the intricate aspects of this system by examining the price ranges of allowances over its various phases and elucidate the vital learnings drawn from its implementation.

EU-ETS Allowance Pricing Through Different Phases

1. Phase-1: The EU-ETS began with an allowance price in the ballpark of 25 – 30 euros per allowance. However, as banking was not permissible in this phase, the presence of an oversupply led to a price drop, thereby challenging the efficacy of the phase.
2. Phase-2: With the introduction of the banking feature, there was a stabilization of prices in the range of 20 – 25 euros. The economic downturn, however, impacted the demand, thereby exerting pressure on the price mechanism.
3. Phase-3: Despite the commencement of this phase with an oversupply of allowances, which in turn brought down prices, the recent years have observed a surge in prices. The last three years saw the price reaching an impressive 54 euros due to the planned stringent reduction in allowances for the 2021 – 2030 period.

Gleaning Insights: What has the EU-ETS Taught Us?

1. Reliability of the Cap-and-Trade System: One of the foremost takeaways has been the realization of how effective a cap-and-trade system, like the EU ETS, is in assuring a binding and credible reduction in emissions. The continuous yearly trimming of allowances stands pivotal in ensuring the EU ETS’s commitment to long-term decarbonisation, something a carbon tax could not guarantee.
2. Responding to Economic Flux: The economic and sovereign debt crises had a profound impact on European industries. With a reduction in cement production, oil refining, and power generation, the demand for emission allowances dwindled. However, the supply, predetermined in nature, remained static. This disparity demanded interventions like the Back loading of auctions, elevation in emission reduction targets, retiring certain allowances, expanding the scope of the system, limiting international imports, and introducing strategic reserves for better price management.
3. EU ETS as a Comprehensive Carbon Pricing Tool: Serving as an essential carbon-pricing instrument, the EU ETS has efficiently priced carbon resulting from fossil fuel utilization within the European Union. It has effectively covered the majority of emissions in the energy-intensive sectors, particularly the electricity sector.

Conclusion

The EU-ETS stands as a testament to the European Union’s forward-thinking approach to address environmental challenges. While it has navigated through challenges, it has evolved, adapted, and consistently aimed at reducing emissions effectively. The journey of the EU-ETS offers valuable insights not just for Europe but for the entire world, emphasizing the importance of collective action, adaptability, and continuous learning in the fight against climate change.