EU Emissions Trading System has cost-effectively reduced emissions, sparked innovation: EDF report

(Washington – October 17, 2012) The European Union’s program to cut global warming pollution, the EU Emissions Trading System (EU ETS), has driven significant reductions in greenhouse gas emissions and sparked innovation in low-carbon processes at much lower-than-expected cost, according to a new report by Environmental Defense Fund (EDF). The report comes just as the EU ETS is concluding five years of full operation and transitioning to its next phase, which runs from 2013-2020. 

EDF policy and economics experts concluded in The EU Emissions Trading System: Results and Lessons Learned that while a more ambitious reduction target for EU emissions in 2020 or 2030 is necessary to achieve the EU’s long-term goals, the EU’s Emissions Trading System has driven significant reductions in greenhouse gas emissions – even during periods of growth in Europe’s gross domestic product.

“What we found very clearly is that after a three-year trial period and almost five years of full operation, the world’s first global warming cap-and-trade program is doing exactly what the EU designed it to do – cut dangerous emissions, spur the deployment of low-carbon innovation, and do so at low cost,” said EDF Attorney and report co-author Alex Hanafi.

The EU ETS applies to 40% of the total greenhouse gas emissions of the 30 participating countries. Additional sectors will come under the cap in January 2013.

“While many people are acutely aware of the global recession, Europe’s struggling economy, and today’s low market prices for EU emission allowances, we found that there is another reality that is less well-known: despite some initial challenges, the EU Emissions Trading System is successfully reducing the EU’s global warming pollution, and offers real lessons to other countries and states seeking to decouple economic growth from emissions growth,” said Hanafi.

EDF highlighted six major results from the EU ETS since its start in 2005:

1. The EU ETS has achieved significant emission reductions at minimal cost. 
2. Although over-allocation of emission allowances and a sharp drop in their prices occurred during the program’s pilot phase (2005-7), the policy stability created by longer-term targets subsequently led to durable investments in reducing emissions and deploying low-carbon strategies.
3. Windfall profits occurred in some member states, but can be avoided using a variety of policy tools.
4. Reforms have improved the elements of the EU ETS that allow emitters to tender credits earned from projects reducing emissions in developing countries (“offsets”), but further reforms would be useful.
5. The EU ETS has made significant progress in preventing any recurrence of the tax fraud and theft of allowances that occurred during the program’s early years.
6. Companies and entrepreneurs have responded to the ETS and its complementary policies with a diverse range of profitable investments in low-carbon solutions.

As the first large-scale CO₂ cap-and-trade system, the EU ETS presents a unique learning experience for other regions, nations, states, and even local jurisdictions considering carbon-trading systems – including California, whose own cap-and-trade law launches Jan. 1, 2013.

“Lessons from the EU’s Emissions Trading System have relevance all over the world and nowhere more so than in California, where regulators and policy makers have been working hard to proactively adapt to the challenges revealed by the EU’s early years of implementation” said Derek Walker, EDF’s California-based Director of Strategic Climate Initiatives. “The bottom line is that emissions trading has been an economic and environmental success in the EU and it will be in California too.”

Additional resources:

• Web page: http://www.edf.org/climate/eu-emissions-trading-system-report
• Report--The EU Emissions Trading System: Results and Lessons Learned [PDF]: http://www.edf.org/sites/default/files/EU_ETS_Lessons_Learned_Report_EDF.pdf
• Lessons for California from the EU Emissions Trading System: http://www.edf.org/caeuets