The EU Emission Trading Scheme After One Year. Experiences and outlook

The report analyses the development in the EU emissions trading scheme during its first year of operation, and discusses the outlooks for the future. The prices of emission allowances have turned out much higher than most expected before the system was launched. There are several explanations for this. Substantial cuts in the allocation of allowances were made during the Commission review process. High gas prices have increased the cost of fuel switching from coal to gas within the power sector, and increased the marginal abatement costs. These are the two most important explanations.

Using ECON's carbon market model we estimate the quantitative effect that this has had on the allowance price and the effects on the electricity price. The model simulation indicate that a with a allowance price of €20 the electricity price in the Nordic area is increased with approximately 10 öre/kWh, compared with no emissions trading. If the allowance price increased to €30 it adds an additional 10 öre/kWh to the electricity price (10 öre ~ 0.011 €).