The European Union's Emissions Trading Scheme: A View of the Future?

The European Union's Emissions Trading Scheme (ETS) has far-reaching implications and is affecting the US debate regarding mandatory carbon dioxide (CO2) programs. Understanding this ongoing experiment is critical to understanding the potential role of emissions markets in US CO2 policy development.

* Current CO2 price signal generates limited response. Although price signals can provide valuable market information, the ETS demonstrates that effective CO2 mitigation policies require more than simply establishing the price signal.
* Distributional effects are changing the allowance allocation debate. The pass-through of CO2 costs to power prices is changing the debate over allowance allocations, and for the first time policymakers are seriously considering options for limiting the amount of allowances allocated to power generators.
* Greenhouse gas offsets do not ensure lower allowance prices. The ETS demonstrates that the economic benefits of an offset program can be a challenge to realize. Linking offsets with the ETS has not affected allowances prices over the first 18 months of the program.

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