No. 39 - The Emissions Trading System of the European Union (EU ETS)

Emissions Trading Systems (ETSs) are gaining importance as tools to implement decarbonization policies by means of carbon pricing mechanisms. Economic theory has demonstrated that such'cap and trade' systems can be more effective than tax-based systems in pricing the externalities of pollution. The European ETS (EU-ETS), created in 2005 and currently the world's most developed emissions market, is one of the pillars of the European transition to a green economy. Manufacturing firms and financial companies both participate in the market, with the latter significantly contributing >to its liquidity, but also to the volatility of the prices of traded emission rights. In this paper, we review the literature on emissions trading systems (also known as pollution rights markets) and >focus on the development of the institutional framework of the EU-ETS and on market-price trends and determinants. We also consider ETSs operating under other jurisdictions and the process of international integration of these systems.