EU's Emissions Trading System in the Presence of National Emission Targets

Abstract

In 2005 EU will launch its emissions trading system (ETS) under which energy intensive firms within EU may trade carbon emission allowances. This system is by many seen as instrumental for EU’s ability to fulfill its Kyoto commitment. At the same time, in what seems to be an ambition to go one step ahead, Germany, Sweden and the UK have adopted national greenhouse-gas emission targets equal to or below the so-called Assigned Amounts that EU’s burden-sharing agreement for 2008-12 allots to these countries. It is shown here that implementation of these policies means that EU’s greenhouse-gas emissions during 2008-12 would be an increasing function of the aggregate net sale of emission allowances by ETS firms in countries with national emission targets. One implication of this circumstance is that the climate policies announced by Germany, Sweden and the UK are incompatible with the burden-sharing agreement and the Kyoto Protocol.Tradable Emission Permits; Climate Policy