The Co2 Allowance Price in the European Emissions Trading Scheme: A Risk of Importing the Disease or Not?

Since January 2005 large installations from the energy industry and other carbon-intensive industries are part of an EU-wide greenhouse gas (GHG) emissions trading scheme (EU ETS). It covers over 10,000 installations that are responsible for about 50% of Europe's CO2 and 40% of its total GHG emissions. It is expected to help achieving the EU's obligations under the UN Framework Convention on Climate Change and the Kyoto Protocol in a cost-effective way. The author Eva Benz examines the price of the EU CO2 allowances (EUA) by using empirical and experimental analysis as well as theoretical models. She examines the EUA price pattern that has evolved in Phase 1 (2005-2007) by studying daily spot prices and high frequency data for EUA futures. Besides, she analyzes CO2 allowance prices under different policy and market behavior scenarios. A laboratory experiment with students is concerned with the annual initial allocation process of EUAs to the participating firms. The focus is on using auctioning as (part of the) allocation mechanism as suggested by the European Commission in 2008 in the "Climate action and renewable energy package".