The environmental efficacy of the European union emissions trading system

The European Union (EU) implemented the first international cap-and- trade system for greenhouse gases in 2005 with its Emissions Trading System (ETS). To examine the potential environmental efficacy of cap-and-trade systems as a policy instrument for negative production externalities on an international scale, this study tests the effect of the EU ETS on national carbon dioxide (CO2) emissions during its first two phases, 2005-2007 and 2008-2012. Five EU states achieved a significant decrease in CO2 emissions after the commencement of the EU ETS in 2005. Six EU states have experienced significant decreases in CO2 emissions since the beginning of Phase II in 2008, when the emissions cap for the system was lowered. Germany is examined as a case study to determine the effect of the EU ETS in the context of national climate change policies overlapping with the system. It is found that a maximum of 4.25 Mt of CO2 were abated each year in the country due to the EU ETS during Phase II. The EU ETS is likely to have had the largest effect on German power generation and has induced complex effects on decision-making at the firm level in the industry.