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The EU Emissions Trading Scheme (ETS) is the EU’s flagship cap-and-trade scheme, which is a “cornerstone” for the EU’s effort in reducing greenhouse gas emissions by 40% by 2030. The aim of the scheme is to incentivise emissions-intensive installations, such as fossil power stations and industrial plants to internalise the cost of climate change. The Stern Review, a landmark study into the economics of climate change, suggests that placing a value on emissions is the most effective way of reducing climate change. Bright Blue has already published an extensive overview of the EU ETS in previous publications.

The cap-and-trade scheme must be firstly given credit for being successful in reducing the total amount and intensity of carbon emissions in this area, for example by moving the power sector away from coal. Although it is difficult to quantify its exact success, these conclusions can be made with “greater certainty”. These reductions have also not led to carbon leakage (the idea that increased carbon compliance leads to polluters relocating to other jurisdictions), or had significant detrimental effects economically, despite a lack of a ‘global carbon market price’.

The UK’s future in the scheme is uncertain. In 2017, it was suggested that the UK remain party to the ETS until 2020, unless sufficient reforms were made to the scheme. These reforms are “essential” according to Sandbag, a climate change think tank, and the UK’s potential withdrawal from the scheme should not be a substitute to these reforms.

One area which must at the very least be investigated is the surplus of emission permits in the carbon market. The current estimate is around 4.5 billion permits. This causes major problems if the ETS wants to effectively work using market mechanisms. A market flooded with surplus permits distorts prices for these carbon permits, and thus minimises the full effectiveness of carbon-reduction measures. In an attempt to increase prices, there has been some response, by pledging to withdraw 1 billion permits by 2021 (after the 2020 period).

Within the industrial sector, there have been questions about the true effectiveness of permit allocation. There is limited evidence to suggest that the scheme has led to any emission reductions: a business-as-usual trajectory would have suggested similar effects in emissions. This is because the industrial sectors are not fully exposed to the carbon price, as they receive emission permits which are free. These Free Allocations actually de-incentivise and undermine the ETS’ goal of low-carbon innovation and investment. This is another area in need of reform.

In addition, the UK’s exit from the scheme would also have significant effects on the EU’s 2030 targets. The UK has achieved one of the highest rates of emissions reductions of all Member States. Consequently, by removing the UK from the 2030 target, the EU would also have to reform the scheme to ensure that it meets its 40% reduction target, by adapting national targets to ensure the 4.5% deficit is made up. However, increased targets are not likely to be well received by all Member States. Moreover, the UK’s removal from the bloc would leave the EU climate policy in the hands of “more reticent countries” .

However, assuming a relationship is not maintained between the UK and the EU’s ETS, there appears to be an open door for Mrs May to “lead the way” in emission trading schemes. If the UK were to “pursue vigorous innovative policies”, developing on similar models, the UK may itself become the leaders in this field. The ETS is a worthy model to work from, but undoubtedly requires development.

To fulfil this potential, Parliament must produce a scheme which compliments their ambitious carbon reduction targets. The UK must learn its lessons from the ETS, both positive and negative, and create a scheme which both delivers a reduction in carbon emissions and minimises the threat of carbon leakage. The UK is already a leading figure and advocate of tackling climate change, and if the UK does implement an effective independent carbon pricing scheme, before long it may be the EU following the UK’s guidelines as a source of inspiration.

Daniel Warren is a 3rd year law student at the University of Bristol. The views expressed in this article are those of the author, not necessarily those of Bright Blue.