EU ETS Phase II allocation: implications and lessons (CTC715)

The EU ETS has emerged as the primary instrument for reducing CO2 emissions across power generation and heavy industry in Europe. By setting a price on carbon, it aims to generate incentives for companies both to reduce their operational emissions and to invest in lower carbon technology. The allocation plans now agreed for Phase II (2008-12) make it likely to succeed in the first aim, but not the second. The incentives for low carbon investment could still be improved if governments auction more of the Phase II allowances, and define carefully the longer term structure of the scheme.

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