Is emissions trading a solution to climate change?- A study with the focus on the European Union Emissions Trading Scheme

Abstract: Climate change affects us all through rising sea levels, environmental degradation and rising temperatures. The issue with climate change emerges from the fact that the discharge of carbon dioxide creates negative externalities, which causes the market to reach an inefficient allocation. The European Union has chosen to respond to the problem with a market-based policy and established an emissions trading scheme (ETS) to create a market for carbon dioxide. The market puts a price on the right to emit and therefore creates an incentive for companies to reduce their emissions. Whether this market has had any impact on the emissions of carbon dioxide and can therefore be a solution to climate change is the question being treated in my report. The question is addressed through a qualitative approach where environmental economic theory is compared with the reality of emissions trading. The progress towards emission reductions is determined based on current reports from leading organizations such as the European Environmental Agency. The market for carbon dioxide in the European Union has so far exhibited some proof of contributing to emission reductions, but has the at the same time encountered issues such as a loose cap put on the carbon dioxide emissions, which has led to an unstable price on the emission allowances. The excessive lobbying from companies for these allowances is also a problem with the marked-based policy. On the other hand, the EU ETS has in some periods successfully put a price on carbon dioxide and companies have responded to the policy. Based on the current report from the European Environmental Agency, small emission reductions will be reached through the EU ETS. But the target of an emission reduction of 8% relative to the base year 1990 to which the EU-15 has common committed to in the Kyoto Protocol, will probably not be reached. Based on my findings, the EU ETS in its current form is not the solution to climate change, however may together in a policy mix with other policies targeting individual behavior, technical change and clean energy be a part of the solution to climate change.