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emissions trading and alternatives in Europe

Approaches to emissions trading and alternatives, European ETSThe question of emission permits of some kind as a basis for trading in them or trading them off has been approached in several different ways. They may be auctioned, or they can be allocated to firms on the basis of historical emissions (known as grandfathering). Within countries, emissions (e.g. carbon) taxes may be used rather than emissions trading, but still linked to the price of permits. An attractive feature of tradable permits is that any national scheme can be linked internationally. However, the emission caps need to be set by regulators, who have an impossible task in the light of normal uncertainties, as shown the first decade of the EU system. Also it tends to reward traders more than innovators.The best-developed arrangement is the European Emissions Trading System (ETS), which was intended as the cornerstone of EU policy to counter climate change, but seems unlikely to deliver. The ETS is a cap-and-trade system, which means that a limited cap is set on the total amount of certain greenhouse gases, notably CO2, that can be emitted by defined industry sectors. Within the cap, companies can receive or buy allowances that can be traded with one another. The cap is then linearly reduced over time so that total emissions decrease. From 2012 national caps became an EU-wide cap. The ETS is seen as providing the core of a wider scheme to limit carbon emissions worldwide. It aims to reduce Europe’s emissions 40% below 1990 levels by 2030. It covers some 11,000 installations (power stations and industrial plants) in 28 EU countries plus Norway, accounting for nearly half of the EU’s carbon emissions. However, it does not count emissions from burning biomass, which have become large. All bioenergy is counted as zero-carbon inside the ETS, and there are policy incentives to replace coal with biomass as a means of increasing the share of renewables in the energy mix. With the trading of allowances, this results in more CO2 emissions. In 2014, over 60% of renewable energy in Europe was bioenergy or waste, which helpfully complements intermittent and non-dispatchable wind and solar.