The European Union’s Emissions Trading Scheme: a policy response to the Kyoto Protocol

Abstract:

This paper focuses on potential implications from the introduction of the European Union's Emissions Trading Scheme in January 2005 (EUETS) for defined 'point sources', or stationary installations, in the energy and manufacturing industries. This Scheme is expected to become integrated with international emissions trading from 2008 within the framework of the Kyoto Protocol, following the implementation of that agreement in February 2005. The paper explains the background to the EUETS, focusing on its structure as a 'cap and trade' system for defined installations, and how it differs from the UK's Emissions Trading System, which preceded it and will continue to operate in parallel until 2008. The paper highlights some of the difficulties in harmonization of the Scheme across all of the member countries of the EU and then discusses the economic implications arising from increased energy prices and consequent increased operating costs for energy-intensive industries. The paper concludes that this may give rise to continued relocation of manufacturing industries from Europe to countries not subject to emission targets or caps, such as China, India and the USA. This relocation may be mitigated if European industries implement carbon saving technologies and procedures in a cost-effective manner, and such actions will become particularly important if those countries not subject to targets before 2012, such as China and the USA, do not change their position thereafter.