The effectiveness of the EU Emissions Trading Scheme

How effective is the EU Emissions Trading Scheme (EU ETS) in promoting emissions reduction for compliance with the Kyoto Protocol commitment? A theoretical benchmark is determined in order to assess the stringency of the ETS cap and to evaluate whether emissions allowances have been over-allocated. This analysis clarifies how the emissions reduction effort has been divided between ETS and non-ETS sectors, highlighting the extent to which Member States effectively rely on the ETS to comply with their Kyoto commitments. Finally, inefficiencies relating to the over-allocation of allowances are analysed; namely cross-subsidization from non-ETS to ETS sectors, national subsidies to the ETS sectors, and distortion of competition.