ARLINGTON, Virginia (The PEW Center) - The Pew Center on Global Climate Change has released a new report examining the European Union’s Emissions Trading Scheme (EU ETS) that offers a realistic assessment of the system’s initial objectives and outcomes. The report, "The European Union’s Emissions Trading System in Perspective," by A. Denny Ellerman and Paul L. Joskow of the Massachusetts Institute of Technology, examines the development, structure, and performance of the system to date.

As the U.S. Congress moves closer to developing a national climate change policy, this report delivers key insights into the world’s first carbon dioxide cap-and-trade program. Through analysis of the controversies and lessons learned from the program’s initial three-year trial phase, the authors provide important information for U.S. policy-makers and other countries. Main findings of the report include:

• Good information is critical. Accurate data on baseline emissions is needed to create an effective trading system that results in sufficient emissions reductions;
  
  
• Suppliers quickly factor the price of emissions allowances into their business decisions under a cap-and-trade program;
  
  
• Price volatility can be reduced by including banking and limited borrowing of emissions allowances;
  
  
• The relationship between allowance allocation, allowance markets, and the unsettled state of electricity regulation must be understood and addressed to avoid unintended consequences; and
  
  
• The linkage of 28 separate trading programs in the EU ETS provides a valuable prototype for a globally linked carbon market.

The report finds initial concerns with the EU ETS are being addressed and the program’s trial period has provided important lessons about the creation of new emissions trading schemes. In fact, the system has worked much as it was envisioned - it established a European-wide carbon price; caused businesses to incorporate this price into their decision-making; and created the infrastructure for a multi-national trading program. In addition, emission reductions were realized in some covered sectors which underscore the system’s initial benefits.

The report helps address key cap-and-trade concerns in the U.S. and internationally, including over-allocation, price volatility, and excessive "windfall" profits. While it remains a work in progress, the EU ETS affords many important lessons for policy-makers and major stakeholders to consider when developing appropriate short- and long-term measures to limit greenhouse gas emissions.

The Executive Summary is available here.

The Full Report is available here