The EU Emissions Trading Scheme (EU ETS) and the Future of Global Carbon Markets
Sanjay Patnaik: Visiting Scholar, The Wharton Business School; Assistant Professor: The George Washington University
Sanjay has years of research and knowledge on European Union Emissions Trading Scheme (EU ETS). His focus is on how efficient is the market, how firms and interest groups engage with regulators, and how regulatory programs allow firms and interest group to capture economic rents, His research evaluates strategic firm behaviors and look at the political economy of environmental regulation. These research is based on interactions with top regulators in the EU commission as well as researchers and institutions in the US and EU, as well as the private sector as well as the public inputs.
Over the last 8 years, the amount of CO2 increase has been shocking. With this in mind, more and more nations and markets are starting to implement some type of carbon cap and trade market. Cap and trade is attractive in the policy perspective because: provides flexibility to achieve desired environmental goals, market based policy tool, and program has a binding emissions cap.
EU ETS is an essential part of the EU’s policy to combat climate change. The program is the first multinational cap and trade program that covers all EU countries as well as others. The EU ETS covers various industries including power and heat, oil refining, iron and steel, aluminum, metals, chemicals, as well as commercial aviation, pulp and paper, cement and lime.
In his research, Sanjay found some interesting aspects of the EU ETS. The first is the EU Allowance allocation as well as the EU Allowance Price. Allocation of the permits was not based on any guidelines which resulted in some industries to achieve surplus while others have shortfalls. This made the market and pricing of the permits to be very diverse. Furthermore, the economic crisis in 2008 has also disrupted the allowance market. The second is in offset credits. Offset credits was introduced into the market to be an incentive to have companies further reduce their emission. Projects that are certified via certified emission reductions can obtain offset credits and these credits can be put on the market to be purchase by those that need the emission credits. The different market value of EU allowance credits and the certified emission reduction credits has created a market itself that some firms have profited from. The third is the learning phase. From the beginning, many have limited experiences and there was great economic pressure. The decentralized allowance program also made regulations quite difficult, but today the EU ETS has great programs that is the largest in the world and modeled by many other markets.
Of course the EU ETS is still in a learning phase, and Sanjay has suggested multiple options for the market and the changes that should take place. Better distribution of allowance credits have been implemented, limitation of off-set credits from outside the market has been set, and reduction of cap at a set percentage are just but of some changes that the EU ETS is currently proposing.
Overall, Sanjay’s research shows that the Golden age of offset credits in developing countries is likely over. The EU ETS will most likely stay in place well beyond 2020. The US carbon market will continue to rise especially with the developments in California. Sanjay’s research also suggest that a national or regional carbon market works better than that of a global market. The carbon market provides opportunities for innovative entrepreneurs, consultants, and climate experts to dive into.
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