Cap or Trap

How the EU ETS risks locking-in carbon emissions

Damien Morris

13 September 2010 | < 1 min read


This report critically evaluates the performance and prospects of the EU ETS as it currently stands. It explores how Phase 2 caps have been weakened by recession, and how slack from Phase 2 – in the form of unused offset credits – is likely to defer abatement within the EU for much of Phase 3. In addition we explore how large, undeserved surpluses have accrued to specific sectors and companies within the EU ETS.

Executive summary

Phase II - large reductions, low abatement

Our projections find it unlikely that the Phase II cap would constrain emissions by more than 32 Mt across the full 5 years of the phase

We are now two years into the second phase of the EU Emissions Trading Scheme (ETS) and it is already clear that, like Phase I, Phase II will fail to deliver significant abatement. Furthermore, the low cost and high availability of offsets make it highly unlikely that what little abatement is delivered will take place in Europe.

In addition, one billion superfluous permits were awarded to industry and to combustion plants involved in manufacturing, canceling out the need for any abatement under the scheme. The largest share of these surpluses accrued to the cement and steel industries, the two sectors which have lobbied most aggressively to weaken the ambition of the scheme.

The following recommendations seek to prevent a repeat of these problems and minimize their future repercussions:

  1. Adopt a 30% 2020 target
  2. Adjust Phase III caps to reflect historic emissions
  3. Reassess carbon leakage risks
  4. Control for drops in demand
  5. Restrict the quality and quantity of offsets

Without these or similar measures, the ETS risks becoming an emissions trap and an increasingly redundant tool in European climate policy.