What’s the difference between the EU’s emissions trading scheme (EU ETS) and the Kyoto Protocol’s trading systems?

Published February 05, 2006

The answer to this question is multi-faceted. The simplest way to think about it is that the EU ETS is basically a "domestic" trading system for the EU (treating it as a single political entity), through which emissions allowances (and thereby required reductions) are allocated across sectors and companies within the EU. The Kyoto Protocol's trading systems, on the other hand, allow project-based reductions and other allowances external to the EU to be imported for purposes of helping meet the EU's Kyoto Protocol commitments. Countries or companies within the EU can take advantage of these external trading mechanisms, effectively relieving the pressure for on-site emissions reductions. This should allow market-clearing prices to be considerably lower than they otherwise would be.

The interplay between the EU ETS and the Kyoto Protocol's systems will change over time. The first phase of the EU -ETS, running from 2005-2007, was intended to be a "dry run" for the second phase that would run in parallel to the Kyoto Protocol’s first commitment period from 2008-2012. But two of the Kyoto Protocol’s three trading mechanisms don’t start until 2008 (project-based Joint Implementation and country-to-country trading of excess allowances, often referred to as "hot air"). The third Kyoto trading program (the Clean Development Mechanism) is already underway, but will take several years to develop to its potential. The short-term nature of demand in the first phase of the EU-ETS, and the absence of supply from the Kyoto Protocol’s trading mechanisms, helps explains why EU ETS prices are so high right now. Prices should look quite different by early 2008, once both trading systems are fully up and running.

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Dr. Mark C. Trexler has more than 25 years of energy and environmental experience, and has focused on global climate change since joining the World Resources Institute in 1988. He is now president of Trexler Climate + Energy Services, which provides strategic, market, and project services to clients around the world.

Got a question for our climate expert? Email Editor@GreenBiz.com.

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