The EU Emissions Trading Scheme (EU ETS) is the main instrument to reduce greenhouse gas emissions in Europe. Subject to a country specific limit, installations in the EU ETS can use EU allowances (EUA) and certified emissions reductions (CERs) generated through the Clean Development Mechanism...

In the European Emission Trading scheme the supply of allowances exceeds emissions - cumulating, according to our estimates, in a surplus of 2.7 billion tonnes by 2013/2014. We find that initially the surplus was acquired by power companies so as to hedge future carbon costs. As the surplus...