Abstract
The Kyoto Protocol envisages the use of various instruments to achieve emission reduction targets, one of which is the European Union Emission Trading Scheme (EU ETS), the most important market worldwide for CO2 emission allowances. The volume of European Union Allowances traded represents over 45% of all the carbon dioxide generated by human activity within the continent. In its first two phases (2005–2012), the behaviour of the EU ETS was erratic, as a result of discretionary policies, an oversupply of allowances and reduced economic activity due to the global crisis. These factors caused excessively low prices that distorted the initial goals of achieving low-carbon solutions. From 2013, changes were made to the market regulation mechanisms in order to correct these structural deficiencies. Empirical analysis of daily prices in the two central phases of the market, following the pattern of ARCH and GARCH models, shows that the measures taken within the EU generated greater confidence and stability in the market and thus reduced volatility. Subsequent price behaviour, following a bullish path, has confirmed the success of the measures taken and their contribution to fulfilling emission reduction targets.
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Notes
The Kyoto Protocol was drafted with the initial objective of reducing global greenhouse gas emissions, during the period 2008–2012, by 5.2% in relation to 1990 levels.
Each permit allows the holder to emit one metric ton of carbon dioxide (CO2), or equivalent amounts of nitrous oxide (NO2) and perfluorocarbons (PFCs).
Similar to the ETS in the European Union, other “Cap & Trade” systems have been adopted in other countries or regions, such as the CCX (Chicago Climate Exchange) created in the USA in 2003, and the NZ ETS (New Zealand Emissions Trading Scheme), applied since 2009 in New Zealand, among many others.
Croatia’s entry into the EU ETS took place at the start of Phase III.
Only sectors considered to be at risk of carbon leakage (i.e. production or investment relocation to areas that do not have emission limits, leading to an increase in global emissions) receive a free allowance allocation.
In July 2015, the European Commission proposed an amendment to the EU ETS, increasing the speed of decline of the annual emissions cap from − 1.74% per year to − 2.20%, and enhancing the carbon leakage framework to preserve the competitiveness of European industry (FTI-CL Energy 2017).
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This contribution was carried out with funding and support from the Social-Labour Statistics and Demography project (30.BB.11.1101), being conducted at the Faculty of Labour Sciences (University of Granada).
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Galán-Valdivieso, F., Villar-Rubio, E. & Huete-Morales, MD. The erratic behaviour of the EU ETS on the path towards consolidation and price stability. Int Environ Agreements 18, 689–706 (2018). https://doi.org/10.1007/s10784-018-9411-3
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DOI: https://doi.org/10.1007/s10784-018-9411-3