Overview

The initial trading phase of the European Emission Trading Scheme (ETS) was designed as an experimental phase to gather emissions-trading experience. In the ETS's first year of operation, however, low hydro conditions, weather, and high gas prices intervened to make the targets more difficult to achieve than originally anticipated, while low-cost options have failed to provide the volume required to meet emission limits. As a result, the price of carbon dioxide (CO2) has increased from €8 to €20-€30 per ton, raising questions about the impact on companies' profitability and consumers' energy bills.

Small changes in weather, hydro conditions, power demand, and fuel prices will make large differences in CO2 prices. Increased volatility and periods of high CO2 prices can be expected toward the end of the first phase as the market responds to changing conditions.
The billions of euros at stake call into question the effectiveness and sustainability of an experimental scheme that lacks long-term rules but requires long-term investment.
The ETS must likely evolve into a hybrid structure to remain sustainable. Designing the second phase of the ETS will involve a vigorous debate over ways to mitigate its impact on companies and consumers.
The ETS's evolution over the next two years will provide key direction and insight by which to assess the future of trading as a policy tool to reduce CO2 emissions. In the coming year significant decisions and events will include potential reactions to CO2 prices if they skyrocket, government development of national allocation plans for the second phase, and the EU reactions to these plans.