The European Union Emissions Trading Scheme: Issues in Allowance Price Support and Linkage

In 2008, the European Union established what seemed like an ambitious cap (−21% from 2005 levels) for the third phase (2013–2020) of the European Union Emissions Trading Scheme (EU ETS). Ex ante modeling—which took account of the reductions in emissions resulting from meeting the renewables target and the inflow of project-based credits—indicated that this would result in an approximate allowance price of €30 per tonne of CO2, which was judged to provide the necessary financial incentive to abate emissions, to support carbon capture and storage and innovation in alternative energy supplies, and to discourage member states from doing their own thing in terms of price support and other measures. The only linkage was the acceptance for compliance purposes of Clean Development Mechanism and Joint Implementation credits. But in 2013, all has changed; the allowance price is approximately 75% less than what was anticipated, a friends-of-coal lobby has emerged in the EU, and opportunities to link with other ETS are now becoming a reality. This article tells the story of the allowance price collapse, emerging opportunities for linkage—including promising developments in China—and what recent literature has to offer in both understanding the past and informing the future.