A Study On European Union Emission Trading Scheme

To combat Global Warming, the European Union(EU) established the world’s first international system for emissions trading in 2005 under the framework of the "Kyoto Protocol" and "United Nations Framework Convention on Climate Change". After a decade’soperations, the European Union Emissions Trading Scheme(EU ETS)has become the most influential emissions trading system in the world with the largest number of participating counties and the biggest trading volume. Currently China doesnot need tofulfill the greenhouse gas emissions reduction task by obligation, but as a global economic giant,China must take responsibility for global environmental problems in near future. In early 2013, China has successively established several pilot emissions trading markets in Shenzhen, Beijing, Guangdong, Shanghai, Tianjin, Hubei and Chongqing and other major cities. This is a great step towards acentralized emissions trading system.Among those EU ETS participating countries, there are great differences in the economy performance and living standards. The multi-participant structure and the complexity of EU ETS make it similar tothe future Chinese centralized emissions trading system. Analysis of EU’s emissions trading system could help usto build an emissions trading system with less detours.In this thesis, the overall mechanism of the European emissions trading system is analyzed from multi-dimension using existing theories and practical experience. The advantages and disadvantages of the EU ETS is studied and discussed.As some radical changes have been made at the beginning of the third stage of EU ETS, the analysis of the causes and methods for its reform by different phasescould help our country to build a better trading system.Firstly, the European Union Emission Trading Scheme’s development is reviewed.As the activities ofgreenhouse gas(GHG) emission reduction increase globally,the establishment of a carbon emissions trading system attracted much attention as an effective control and managing method of GHG emission. Since 2003, the EU started the conception of a regional and international carbon emissions trading systemand by the year of 2015, the EU ETS has already been operating for nearly a decade with the entrance into the third stage in 2013. From the initial phase of exploration to current operational phase, the successful mutation makes the EUETS the lead player in the global emissions trading systems with the largest trading volumes. Along with the steady operation and progressivelydevelopment of EU ETS, the total greenhouse gas emissions within the European Union continue decreasing and expected objectives of emission reduction are achieved. The pattern design and development roadmap of EU ETS are worthy to learn from.Secondly, the experiences of EU ETS’s construction, operation and management are concluded.At the very beginning of the EU ETS incubation, EU commission anticipated already the necessarysupporting policies and regulations. The system’s successful operation during a decade is ensured by the corresponding regulations and policies promulgated continuously. Adequate regulations response to the issues raised during the operation of EU ETS strengthened the system as long as the management of the trading system. Each part of the EU ETS runs closely due to its well-considered design and planning. For the distribution mechanism, free emission allowance allocations and EU allowance auctions are combined after weighing each member country’s acceptance limits and their varied levels of economic development. This combined distribution pattern is originally designed to control the market prices by adjust the ratio of free allowance allocation and allowance actions. Despite the price fluctuations caused by the great proportion of free allowance, the preliminary distribution plan pushed the fast-growth of EU ETS; for the demand-supply mechanism, the needs of emission allowance are relatively small comparing with the emission allowance supplies coming from both European market and other international markets. Subsequently the EU decided to make the threshold of carbon off-set mechanism higher for the third stage of EU ETS to limit the emission allowance supply; in spite of the price fluctuations at the preliminary stage and after several adjustments, the current carbon price could be considered a reflection of actual market supply-and-demand. Thus EU ETS has a relatively complete price mechanism; new policies and regulations of risk management for EU ETS third stage have been implanted by EU, meanwhile a unified trading registration system has been established. Overall, with continuous adjustments and improvements, the current EU ETS has already become a lead carbon trading system in the world that is worth being studied.Thirdly, the effectiveness and impacts of EU ETS have been discussed.As the low-carbon finance has become a major subject for the financial organizations, their activities and roles within the EU ETS have been studies and analyzed. Besides the increasing investments in low-carbon technologies and projects, the financial organizations have promoted the diversity of carbon financial products. The establishment of EU ETS has enlarged the market of the financial organizations; meanwhile, their intense participations stabilized the market structure and fast-development of EU ETS. Furthermore, the data research shows that the economic development in EU didn’t slowing down by the carbon emission limitation. And the natural environment has been improved. These results made EU ETS a reference for other countries and regions. Establishment of emission trading system could be considered a good option for emission reduction.Finally, EU ETS enlightens Chinese emission trading system.As the 12 th Chinese national five-year plan promoted the low-carbon economy, several regional pilot emission trading system have been implanted when a unified carbon emission market is being conceptualized. The well understanding the functions of EU commission in the EU ETS could help the Chinese government position itself well in the establishment of the unified ETS. Based on the analysis of EU ETS’ policies and regulations implantation, various mechanisms and their effectiveness, coping tactics in accordance with Chinese national circumstance are provided as well as suggestions on overall planni ng and strategic l ayout for Chinese future emissions t rading system.