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When in the spring of 2005 the Kyoto Protocol finally entered into force, it established the first multilateral cap on emissions of greenhouse gases and coincided—more or less by accident due to a few delays—with the start of the European Emissions Trading Scheme (ETS) for carbon dioxide (CO2), the first multinational scheme for trading emissions rights. Both are interrelated for many reasons. The ETS was established in the European Union (EU) in the hopes of providing an instrument for supporting efficient efforts to meet the Kyoto targets for the EU and the national burden-sharing requirements. It was constructed in such a way that it can be expanded beyond the borders of the European Union, and it has provisions to include the flexible mechanisms of the Kyoto Protocol—namely, the Clean Development Mechanism (CDM) and Joint Implementation (JI)—thus giving all nations access to the ETS. It is evident that the Kyoto Protocol will not lead to a significant reduction in greenhouse gas emissions worldwide, but it did establish an institutional structure that has the potential to provide a forum for a stronger contribution of states to future emissions reduction efforts. The ETS demonstrates that international emissions trading on a large scale is politically and administratively feasible . Also the ETS is strongly interlinked with the flexible mechanisms of the The European Emissions Trading Regime and the Future of Kyoto gernot klepper and sonja peterson 7 101 The authors would like to thank the participants at the conference for their comments and discussion, which we have tried to incorporate in this article. 10865-08_CH07_rev.qxd 12/10/07 11:41 AM Page 101 Kyoto Protocol and its emissions caps. It thus seems worthwhile to look at the role that the ETS could play in the post-Kyoto era. In order to assess this role, the paper first describes the rules of the game of the ETS and its incentives for participating institutions—that is, firms as well as governments. Following that, it speculates about the impact of the changes that the ETS has brought to the global agenda for carbon management, in particular the attempts to integrate the non–Annex B countries into the Kyoto process. A Short Primer on How the ETS Functions The European Union has agreed to cap its greenhouse gas emissions at 8 percent below the levels of 1990. This overall cap is distributed among the original EU fifteen member states (EU15) in the so-called “burden sharing,” such that country-specific caps range between a reduction of 21 percent relative to 1990 for Germany and Denmark and an increase of 27 percent for Portugal. The ten member countries that joined the European Union in May 2004 have their own individual Kyoto targets. To achieve these objectives, the EU member states have implemented two types of policies. Except for energy-intensive installations, member states are responsible for their own emissions reduction policies, which they can design according to their national preferences. Energy-intensive installations, however, are subject to the ETS. The governments of the member states need to make three fundamental decisions. First, they must determine how much of the emissions reductions necessary to meet the Kyoto targets will be met within the country and how many emissions credits (JI and CDM) they plan to acquire through the flexible mechanisms of the Kyoto Protocol. Second, they need to determine the emissions targets for the energy-intensive installations. From this, the targets for the other sectors are then determined. Third, since the ETS predominantly grandfathers the emissions rights of the energy-intensive installations, these emissions rights need to be allocated to the roughly 12,000 installations. This is done independently by the national governments. So far the ETS has been established for two trading periods. The first trading period encompasses 2005 to 2007, during which the trading system gets under way and the first constraints are placed on emissions with a view to achieving the 2012 targets. The second trading period encompasses 2008 to 2012, during which countries have to meet the emissions caps of the European Union’s burden sharing. The linking directive of the European Union also establishes the possibility of converting CDM credits, the so-called CER (certified emissions reductions) and JI credits, and the so-called ERUs (emissions reduction units) into allowances within the ETS. The emissions allowances that are allocated to the installations participating in the ETS are defined in the national allocation plans (NAPs). The NAPs of the first trading...

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