Prospects for the EU Emissions Trading System

The current price of carbon emissions in the EU is too low to encourage investment in low-carbon infrastructure. The reasons for the price drop are an oversupply of emission allowances and weakened demand due to the economic crisis and complementary emissions-reducing policies.

Several proposals have been made to bring the carbon price back to levels which incentivise ‘clean’ investments. Short-term supply can be reduced by delaying the auctioning of allowances. Longer-term solutions, such as reducing the total number of allowances or introducing a minimum price for auctions, require changes to the ETS Directive. If interventions are not backed up by a credible longer-term strategy, there is a risk of investors losing confidence in the carbon market.

Interventions in the carbon market are supported by the EP, environmental NGOs and some industry groups. Other industry groups andPolandfear that such interventions will damage competitiveness and cause companies to relocate energy-intensive production outside the EU. The European Commission is committed to presenting the first report on the carbon market and proposals for reform in summer 2012.

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