Study challenges conventional view that the ETS has failed, hailing the scheme’s profound impact on the European energy sector.

The widespread view that the EU’s emissions trading scheme (ETS) has failed to deliver expected reductions in emissions “cannot be sustained on the basis of the evidence”, according to a major new study of the first phase of the scheme which hails the cap-and-trade initiative as successful and a “path-breaking” policy experiment.

The study, which has been published in a book titled Pricing Carbon, was undertaken by a group of European and US economists from University College Dublin, the Mission Climate of the Caisse des Dépôts, the International Energy Agency, the University of Paris-Dauphine, the Őko-Institut in Berlin, and the Massachusetts Institute of Technology (MIT).

It assesses the first phase of the EU ETS, which ran from 2005 to 2007 and was widely regarded as a failure due to an overallocation of emission allowances that resulted in a slump in the price of carbon.

However, the researchers estimated that despite the price of carbon falling to almost zero, the scheme still led to a reduction in greenhouse gas emissions of between two and five per cent against business-as-usual scenarios, resulting in carbon savings of 120 million to 300 million tonnes during the three-year period.

Speaking to BusinessGreen.com, MIT’s Denny Ellerman said the research showed the ETS has been a genuine success. “That’s not to say it has not had problems, but it has put in place a system that has reduced emissions and has proven that a multinational cap-and-trade scheme can work,” he explained.

The researchers said the ETS had also resulted in a “change of attitude and practice” among participating firms that has had a “profound impact” on the way they now make operational and investment decisions, adding that the scheme had gone from “a quixotic, and for some, dubious initiative” to being “an accepted fact and the centerpiece of European climate policy”.

Significantly, given current debates in the US surrounding its proposed cap-and-trade scheme, the researchers found no evidence of companies moving out of the EU as a result of the ETS.

Similarly, the study also downplayed complaints from investors that volatile carbon prices were undermining investment in clean technologies, noting that the volatility in the price of allowances during the first phase of the scheme was less than that of the wholesale prices of electricity and natural gas.

“You can criticise the fact that the price is not high enough,” said Ellerman. “But the mechanism is now in place and it has reduced emissions.”

By: James Murray, BusinessGreen, 15 Feb 2010