The EU Emission Trading Scheme. Allocation Patterns and Trading Flows

The EU Emission Trading Scheme (EU ETS) that covers emitters from industry and the energy sector representing 40 percent of the EU's total greenhouse gas emissions is the biggest implementation worldwide of a cap-and-trade scheme. The EU ETS has been the core instrument of European climate policy since its start in 2005. Based on a database comprising more than 10,000 installations in 26 EU countries, this paper provides a thorough analysis of the performance of the EU ETS in the period 2005 to 2010. In the first part, we analyse allocation patterns - i.e., the stringency of allocation caps and distribution issues - on EU country and sector level comparing the results of the EU ETS pilot phase and the first three years of the Kyoto phase. In the second part of the paper, we assess trading flows of European Allowance Units (EUAs) between EU countries comparing the results for the first and second trading period. Furthermore, we analyse the use of credits from flexible mechanisms - Certified Emission Reductions (CERs) from CDM projects and Emission Reduction Units (ERUs) from JI projects - that installations may surrender since the beginning of the second trading period on country level.