This paper focuses on the design of emissions trading schemes in practice. After a short introduction to the general idea of emissions trading, practical requirements for the introduction of an emissions trading scheme are considered, including the temporal and spatial dimension as well as administrative requirements and the role of markets. Historical developments regarding emissions trading are discussed briefly.
Currently, the largest trading scheme is the EU Emissions Trading Scheme (EU ETS) that aims to reduce greenhouse gas emissions in the European industry by 21 percent until 2020 compared to 2005 levels. Because of its prominent role, the basic design features and the process of introducing the EU emissions trading scheme are reviewed in more detail.
Finally, the impact of the EU ETS on the regulated entities is analyzed based on an annual survey among German companies regulated by the EU ETS which is conducted by the Centre for European Economic Research (ZEW) in a common project with KfW Bankengruppe.
As the survey showed, carbon dioxide abatement in Germany is currently achieved by energy efficiency improvements in most cases. Larger abatement volumes through renewal of existing production facilities can be expected to occur from 2020 to 2030. Even if most regulated companies currently receive over-allocation of freely distributed permits, about 50 percent of companies in Germany are active in allowance trading. With regard to future regulation, companies suffer from considerable uncertainty, including uncertainty about allocation from 2013 onwards and general uncertainty about the stringency of greenhouse gas regulation in Europe and beyond.
Heindl, Peter and Andreas Löschel (2012), Designing Emissions Trading in Practice - General Considerations and Experiences from the EU Emissions Trading Scheme (EU ETS), ZEW Discussion Paper No. 12-009, Mannheim. Download