EU ETS Emissions Allowances

The European Union Emissions Trading System (EU ETS) is the main European climate policy tool, enabling economically effective reductions in greenhouse gas emissions. It covers all European Union member states, Iceland, Lichtenstein and Norway. The United Kingdom, part of the system before it left the EU, is now beginning the operation of its own system, the UK ETS. The system currently involves around 10 000 installations in the power sector and manufacturing industry as well as airlines. It covers approximately 40% of the emissions produced by the states listed above.

In countries where CO2 production is regulated by emissions allowances or carbon tax at relevant rates (meaning at least lower tens of USD or EUR), an environment is emerging in which it pays to decarbonise. The most affordable solutions in economic and technological terms – namely investments into energy savings and renewables - are gradually being implemented. If the price of CO2 in the European Union rose by a further approximately 50% to reach EUR 60 / 1 t of CO2 or above, new nuclear power sources would also begin entering the market. Energy savings and renewables would be capable of operating without any subsidies or compensation. Abandoning the coal would then operate based on market mechanisms more quickly and cheaply then the ex officio deadlines set by various coal commissions. Natural gas would also find its place in the energy transition, although – as a fossil fuel – it should not be a long-term solution, unlike next-generation nuclear power plants and renewables. Ideally, these would be small modular reactors (SMR) that are state-independent and operate on a commercial basis.

The introduction of emissions allowances should create a system with simple rules and complete results, the gradual disappearance of bureaucratic systems of fines and exemptions from fines, individual subsidies and guaranteed purchase prices. What would remain would be a robust market environment with a single form of regulation, namely the CO2 price, opening the door to a long-term stable and predictable business environment, open to long-tail companies, and with significantly reduced opportunities for corporate lobbying.

RGGI and WCI Systems

The RGGI (Regional Greenhouse Gas Initiative) is a regional emissions trading system operating in 11 states on the east coast of the USA (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia). The system is operated by an NGO of the same name, which manages an auction platform and register of emissions sources, yet has no regulatory or enforcement powers – these remain with the individual states taking part. The vast majority of CO2 permits is distributed through quarterly regional auctions. The proceeds from these auctions are returned to the participating states and are used, for example, for investment into energy savings, renewables, and other greenhouse gas emissions reduction programmes.

The Western Climate Initiative (WCI) is another similar system in the USA. It currently includes only California and the Canadian province of Quebec, and separately administers emissions trading in the Canadian province of Nova Scotia. It originally included other states in the USA, yet these later withdrew.

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