EU Emissions Trading: The Need for Cap Adjustment in Response to External Shocks and Unexpected Developments? Environmental Research of the German Federal Ministry of the Environment, Nature Conservation and Nuclear Safety ; Project-No. (FKZ) 3711 41 504

Abstract

The effectiveness of an emissions trading system in terms of reducing greenhouse gas emissions is mainly due to the magnitude of the specified emission cap. Assuming sufficient control, a quantitative emission target defined in such a way is quasi automatically achieved by the limited allocation of emission allowances. In functioning markets, this coincides with a somewhat higher allowance price as a scarcity signal for emissions. The cap setting in emissions trading is therefore a central political control mechanism. In order to evaluate the effectiveness of the European Emissions Trading System (EU ETS), the system boundaries in terms of geography, sectors and time and the rules for internationally flexible mechanisms and banking should be observed. EU ETS is a partial system that has so far covered about half of the emissions.