The EU Emissions Trading Scheme and the Challenges for Large Scale Auctioning

Arguably, the climate talks in Copenhagen in December 2010 did not deliver on the high expectations the world had raised for a post-Kyoto agreement. But the commitment to confront climate change at the highest level is beyond doubt. At the time of writing, the EU Commission is to propose a draft regulation on large scale auctioning in the European Union Emissions Trading Scheme (EU ETS) starting in 2013. Integrity and credibility of the EU ETS could be at stake if the EU Commission fails in setting proper grounds for auctioning. After introducing the foundations of cap-and-trade markets, the authors of this chapter confirm that the market architecture of the EU ETS is working and that secondary market trading is functioning. But they also illustrate frictions in price discovery and variability in pricing relations. This leads to the conclusion that efficiency and integrity of the emissions markets are particularly susceptible to institutional uncertainty and supply and demand constraints. Against this background the authors set out recommendations for integrating auctioning into the existing market infrastructure and institutions. This way, large-scale auctioning could ensure a smooth and effective supply of the underlying emission allowances into the markets.