Where is ets based

It also determines how companies are rewarded. Those that have invested more in GHG reduction technologies will be rewarded better under a benchmark BM -based allocation approach, where allocation is based on the level of production multiplied by an emissions intensity benchmark.

Those that have invested less in such technologies will be rewarded better under a grandfathered approach, where allocation is based on historic emissions. However, while BM-based allocation is generally regarded as a fairer method, it is also considered more difficult to design and implement. Indeed, a lower emission intensity can be consistent with higher total emissions as long as the latter grow more slowly than GDP.

In this sense, while the other main ETSs seem to move in the same direction toward similar or common targets, at the moment the route chosen by the Chinese government deeply departs from that of the others.

This applies in particular to the adoption of price floors and ceilings. While the EU ETS has neither a price floor, nor a price ceiling, 28 a different choice has been made by the three other ETSs analyzed, which have all chosen an intermediate path, whereby a price floor, but not a price ceiling is provided. Even in the case of the flatter price trend of the RGGI, it is possible to identify a tendency of the emission price to decline toward the price floor, falling from 2.

A price floor has been introduced also in the province of Guangdong, which is the largest among the Chinese pilot projects and the first to use auctioning see Table A1 in Appendix.

Also in this case, available evidence confirms the tendency to hit the floor: during the first 5 months of implementation of the project December —April , the average price [ Even in Guangdong, therefore, the price floor was effective and probably helped agents progressively adapt to the introduction of the new ETS regime.

In this regard, it may be argued that the followers of the EU ETS might have actually improved the functioning of their ETS with respect to the original EU model and that the introduction of a similar price floor in the EU ETS would have probably prevented the European price from collapsing. Figure 2. Intertemporal evolution of emission allowance prices on different ETS markets.

The analysis performed above has shown many common features in the different ETSs, especially with regard to their scope, allocation method and overall climate change goals to be achieved. As a consequence, a first trend that can be identified is that all the ETSs tend to converge to a common structure. Moreover, the ETS is recognized in all the countries analyzed as a key tool to tackle climate change Grubb et al.

In fact, all the countries analyzed tend to implement their respective cap-and-trade schemes along with other renewable energy and energy efficiency instruments, within the broader context of their national climate change policy.

Furthermore, another emerging trend is the provision of special, softer regimes, protecting the national industrial sector from the major risks related to the loss of competitiveness as a consequence of the ETS obligations.

All the ETSs analyzed RGGI excluded endorse this choice, envisaging a direct, free allocation of allowances rather than auctioning, for some exposed sectors, while requiring a rigorous identification of the sectors benefiting from these special regimes to be determined by the law and usually providing for these exemption regimes to be temporary. Similarly, the RGGI, the Californian, and the Quebec cap-and-trade systems allow the use of credits produced from national offset projects carried out in specific sectors, although the sectors involved differ across the ETSs.

Moreover, all the ETSs allowing for such types of linking solutions i. Notice that if two ETSs are unilaterally linked to an offset market it follows that they will be automatically linked to each other. By this, we mean that one ETS can link to another ETS, so that both ETSs involved mutually recognize their allowances as eligible for compliance under either of the two programs, thus enabling a two-way flow of allowances.

However, several other jurisdictions are currently considering the conclusion of similar linking agreements. As a consequence, the EU is now looking for other partners for the development of bilateral linking agreements that would allow to extend the carbon market and fully exploit the increasing returns to scale that larger markets can generate. The possible emergence of some bilateral linking agreements in the near future has the potential to modify the economic equilibria among the existing ETSs in the years to come.

Think, for instance, of the role that the nation-wide Chinese ETS — that is expected to emerge in the near future — would play in the international context. A bilateral linking, moreover, would probably help the commercial relationships between the linked countries, further reinforcing the attractiveness of linking to China. For these reasons, we may reasonably expect that in the years to come the main ETS regimes will fight to conquest the most attractive partners including but not limited to China.

This might jeopardize the leadership role played by the EU ETS so far, possibly transforming it from forerunner into follower again. The comparative analysis performed in the previous sections highlights positive and negative aspects of the ETSs, some of which are shared by most ETSs, while others represent idiosyncratic features of a single ETS regime. One natural candidate to be introduced in the shortlist of the best features is certainly the existence of heterogeneous installations, coming from different sectors and producing different GHGs.

This element plays a crucial role for effective trading as it allows to exploit different marginal abatement costs. In this sense, the progressive extension to additional sectors and GHGs of the EU ETS certainly went in the right direction, while this feature might need to be further developed in other contexts, such as the RGGI that includes only power plants.

Another desirable feature that most ETSs have introduced is the phasing in of auctioning over time. While grandfathering can be initially justified by the desire to prevent a rapid increase in the costs for firms subject to a new ETS, the regulatory authority must clarify from the beginning that a free allocation of allowances can only be a temporary measure and should set a clear intertemporal path toward auctioning.

This is not to say that auctioning is the panacea for all problems. Difficulties can arise also in the auctioning design, as is well documented in the ETS literature e. In our opinion, however, setting a clear time plan for the progressive introduction of auctioning can provide an important and credible signal that the new ETS is here to stay, which may induce firms to make plans and investments in eco-innovation in due time.

The choice of adopting carbon leakage rules is somehow related to that of auctioning the allowances, though the one does not necessarily imply the other. While auctioning can reduce the risk of windfall profits that may derive from allocating allowances for free, the introduction of carbon leakage rules can lower the risk of delocalization that occurs in the case of unilateral environmental policies.

Moreover, while auctioning may provoke the opposition of the industrial sector that has to pay, differently from what happens with grandfathering , the existence carbon leakage rules can lower this opposition providing the necessary support of the industrial sector to the new instrument.

These two measures, therefore, can be seen as complementary instruments that should go hand-in-hand in the design of an ETS. For carbon leakage rules to be credible, the regulator must set ex ante clear and objective criteria to identify the sectors at risk of delocalization. In this sense, the criteria adopted by the EU and California of taking carbon intensity and trade exposure as criteria to exempt from auctioning the sectors at risk of relocation can certainly be useful, although they might need to be partially improved in the future.

Beyond the risk of production relocation, another kind of leakage may arise in the ETS context. Many of the ETS examined here e. This means they do not cover emissions embodied in imports from uncapped regions. In other words, to avoid the costs associated with an ETS, the economic agents can either move their production activity to countries where no ETS is in place or they can simply import goods from such countries.

Finally, another important provision for a well-functioning ETS may be given by the existence of de minimis rules for small installations. This provision, which is common to most existing ETSs, can be reasonably justified by the high transaction costs that small emitters below some given threshold level would have to face if they were exposed to the same rules as the other emitters. As to the first aspect, if the cap is set too high with respect to the actual demand for allowances, this will obviously result in a low allowance price; if, instead, the cap is frequently revised e.

In our view, both a low price and a highly volatile price may constitute problems that hinder the proper functioning of the ETS. A low allowance price gives agents no incentive to abandon the old polluting technologies and invest in new environmentally friendly ones. A highly unstable price generates uncertainty on the expected returns of investing in such technologies, which may discourage investments in eco-innovation.

If one looks at the development of the main ETSs, it can be noticed that basically all regimes experienced high price volatility. This erratic price trend might have contributed to discourage traded volumes that steadily declined from 21, tons of emissions allowances the day the market was launched to about 1, tons of emissions allowances on September 24, This roller coaster-like trend in the Shenzhen Emissions Exchange probably denotes the difficulty of the operators to adapt to a new market and is likely to discourage eco-innovators, who search for price stability to develop their long run projects.

However, a certain degree of price volatility in the allowance market can be considered physiological as it simply reflects fluctuations of demand and supply.

In this sense, the problem is not price volatility per se but rather how the cap should be adjusted to account for unexpected changes of the economic conditions e. As to the second set of shortcomings concerning the way the ETS operates , important aspects that hinder the proper functioning of the ETS are the lack of temporal flexibility banking and borrowing , of harmonized procedures for verification, monitoring, and reporting, and of appropriate provisions for linking with offset markets and other systems.

As pointed out in the previous sections, the lack of these aspects has proved to be critical for the EU in the past. In some cases e. It follows that, even in the case of inter-States ETSs, such as the RGGI, more similar regulations apply across its members as they are part of the same country. Another reason is that the other ETSs are simply more recent than the EU ETS; one cannot exclude, therefore, that different, more idiosyncratic operational problems might emerge in the future for the followers too.

A final reason might be that followers learned from the initial mistakes of the EU ETS, which was then a prototype to observe but not necessarily a model to be copied in all its aspects.

On the contrary, as someone has ironically argued The Economist, referring to the difficulties encountered by the EU ETS, the latter might have progressively become an example for the other regimes of what not to do. The ETS is going through a crucial moment in the history of the climate change policy tools. In a few years, it has become a milestone instrument for tackling climate change and is rapidly spreading in different jurisdictions, as the preferred tool for pricing carbon.

In such a context, as already noted above, it is correct to state that the EU ETS has represented the prototype regime with respect to all other similar experiences. With this in mind, in the present article, the origin and the evolution of the EU ETS have been described, with a glimpse on its future perspectives.

The analysis conducted above has shown that through the years the EU has modified its role in the use of market-based instruments, such as the cap-and-trade schemes, passing from follower to forerunner.

However, the success of EU ETS has been marked not only by great achievements but also by relevant shortcomings. In fact, the impressive rapidity and efficacy of the EU in building a huge carbon market in a relatively short period of time was counterbalanced by the existence of some relevant drawbacks, which undermined the effectiveness of the system, namely the mix of low average price and high price volatility, as well as governance issues and administration problems. In this sense, it should be highlighted that even the undeniable success of the EU ETS in achieving remarkable emission reductions in a short time period may be questioned on the basis of the concurrent role played the great economic crisis that affected Europe in recent years.

On the basis of this line of reasoning, appropriate corrective measures and a continuous monitoring of the EU ETS functioning need to be adopted to avoid that, once the crisis will be hopefully over, emissions may start increasing again. To this effect, it will be necessary to gather further evidence in the years to come, in order to determine with a sufficient degree of certainty whether the EU ETS has really managed to promote a considerable level of technological change in the European market.

As argued in this paper, these followers share with the EU ETS some common flaws, especially in terms of price volatility, but they have also shown the capacity to innovate and possibly devise alternative ways to manage their own ETS regimes, which may in the long term jeopardize the EU leadership in the ETS context. In particular, as far as price volatility is concerned, the decision by all followers to introduce a price floor turned out to be very useful to prevent their prices from decreasing even further during the recent deep recession.

In this regard, the EU should probably learn from the followers and introduce a price floor in the near future. If this is the case, the ETS would become nothing but one additional financial instrument, losing the environmental motivation underlying its origin. A risk that, in our view, all ETSs should try to avoid, in order to preserve their credibility as suitable instruments to fight climate change in the future.

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest. The authors gratefully acknowledge financial support received under the aforementioned research projects that allowed them to progressively extend and update their research line.

The authors would like to thank also Sebastiano Cupertino for valuable research assistance and two anonymous referees for helpful comments and suggestions on a preliminary version of this work.

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