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The EU Emission Trading Scheme: A Prototype Global System

Denny Ellerman

Post-Kyoto International Climate Policy, Joseph Aldy and Robert Stavins (editors), pp. 88-118, Cambridge University Press, 2010

Denny Ellerman, in: Post-Kyoto International Climate Policy, Joseph Aldy and Robert Stavins (editors), pp. 88-118, Cambridge University Press, 2010

The European Union\'s Emission Trading Scheme (EU ETS) is the world\'s first multinational cap-and-trade system for greenhouse gases. As an agreement between sovereign nations with diverse historical, institutional, and economic circumstances, it can be seen as a potential prototype for an eventual global climate regime. Surprisingly, the problems that are often seen as dooming a global trading system international financial flows and institutional readiness haven\'t appeared in the EU ETS. The more serious problems that emerge from the brief experience of the EU ETS are those of (1) developing a central coordinating organization, (2) devising side benefits to encourage participation, and (3) dealing with the interrelated issues of harmonization, differentiation, and stringency. The pre-existing organizational structure and membership benefits of the European Union provided convenient and almost accidental solutions to the need for a central institution and side benefits, but these solutions will not work on a global scale and there are no obvious substitutes. Furthermore, the EU ETS is only beginning to test the practicality of harmonizing allocations within the trading system, differentiating responsibilities among participants, and increasing the stringency of emissions caps. From a global perspective, the answers that are being worked out in Europe will say a great deal about what will be feasible on a broader, global scale.

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