A study of European union emissions trading scheme

Abstract

A study of the features of the EU-ETS detailing its inefficiencies and factors affecting its performance along with a overview of CDMs and their generation and a comparison with contemporary cap and trade programs. he Kyoto protocol mandates emission caps for countries, which are then translated to caps on emissions for individual entities. This has led to the creation of a ”Cap and Trade” program which allows firms to buy and sell emission rights depending upon their need. This led to the creation of such a market in Europe. This market however, is still in its infancy and suffers from various inefficiencies and is vulnerable to external factors. The market does not see large volumes, which consequently leads to high volatility levels which again lead to lower volumes. The idea behind this project was to study the carbon credit markets, its functioning under the EUETS market regime, the nascent Indian market and the factors which affect the functioning of this market, and to see if any changes can be made to improve the system, and under what conditions would this market function efficiently. We studied a market in sulphur dioxide emission permit trading which allowed the study of a smaller scale cap and trade program and the insights from which could be used to identify problems with the larger EUETS carbon markets. Data was obtained from sources like Bloomberg and other the European Climate Exchange’s website and a regression analysis was run. Further, regression analysis was done on data from energy markets (oil) and the dependence of EUA market with the energy markets was analyzed. The conclusions depend upon the unique characteristics of the EUETS market and the environment in which it operates.