The European Union Emissions Trading System (EU ETS), was the first large emissions trading scheme in the world, and remains the biggest. It was launched in 2005 to combat climate change and is a major pillar of EU climate policy. Under the ‘cap and trade’ principle, a cap is set on the total amount of greenhouse gases that can be emitted by all participating installations. ‘Allowances’ for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their CO2 emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. If emission exceeds what is permitted by its allowances, an installation must purchase allowances from others. Conversely, if an installation has performed well at reducing its emissions, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.
The price of allowances increased more or less steadily to a peak level in April 2006 of about €30 per tonne CO2. In late April 2005, a number of EU countries (the Netherlands, the Czech Republic, Belgium, France, and Spain) announced that their verified emissions were less than the number of allowances allocated to installations. The spot price for EU allowances dropped 54% from €29.20 to €13.35 in the last week of April 2005. In May 2006, prices fell to under €10/tonne. Lack of scarcity under the first phase of the scheme continued through 2006 resulting in a trading price of €1.2 per tonne in March 2007, declining to €0.10 in September 2007. In 2007, carbon prices dropped to near zero for most of the year because the market participants became aware that aggregate emissions were well below the number of allowances issued. The price drop dramatically weakened the incentive to continue reducing emissions.
The carbon price within Phase II increased to over €20/tCO2 in the first half of 2008 (CCC, 2008, p. 149). The average price was €22/tCO2 in the second half of 2008, and €13/tCO2 in the first half of 2009.
The 2012 closing price for an EU allowance with a December 2013 contract ended the year at 6.67 € a metric tons. In late January 2013, the EU allowance price fell to a new record low of 2.81€ after the energy and industry committee of the European parliament opposed a proposal to withhold 900 million future-dated allowances from the market.