Learning annex currency trading

Allowing participating companies to buy or sell emission allowances means that emission cuts can be achieved at least cost. The EU ETS is the cornerstone of the EU’s strategy for fighting climate change. The EU ETS is a ‘cap and trade’ system, that is to say it caps the overall level of emissions allowed but, within that limit, allows participants in the system to buy and sell allowances as they require. These allowances are the common trading ‘currency’ at the heart of the system. One allowance gives the holder the right to emit one tonne of CO2. The cap on the total number of allowances is what creates scarcity in the market.

ETS emissions and how many emission allowances each installation in their country receives. At the end of each year installations must surrender allowances equivalent to their emissions. Companies that keep their emissions below the level of their allowances can sell their excess allowances. How long has the EU ETS been operating?

The EU ETS was launched on 1 January 2005. The first trading period ran for three years to the end of 2007 and was a ‘learning by doing’ phase to prepare for the crucial second trading period. The second trading period began on 1 January 2008 and runs for five years until the end of 2012. What are the main lessons learned from experience so far?