The allocation of allowances in the European Union Emissions Trading Scheme

Abstract

The European Union Emissions Trading Scheme (EU ETS) is the world’s first largeexperiment with an emissions trading system for greenhouse gases and it is likely tobe copied by others if there is to be a global regime for limiting these emissions. Afterproviding a brief discussion of the origins of the EU ETS and its relation to the KyotoProtocol, this paper focuses of allowance allocation – the process of deciding the totalquantity of allowances that Member States may issue and how it proposes todistribute those allowances among the individual polluters which are subject to thescheme. Particular attention will be given on its relatively decentralized structure thatgives individual Member States responsibility in determining the total amount ofallowances, distribution model of the same to the polluters, and allowing certainchoices and flexibility. The results and criticism of this approach in the allocationprocess, together with the role that European Commission has, will be presentedtogether with the proposed changes for the period after 2012.The main objective of the thesis is to shed a light on the necessity to initially buildsystem so that it will provide scarcity of allowances, which would make realisticallyhigh prices so that individual polluters are faced with the viable choice to invest intogreen technologies, rather than buying allowances on the market.