For the second EU ETS trading period, the European Commission intends to create a tighter carbon market, as during the first period (2005-2007) an over-allocation of emissions permits flooded the market and led to a collapse in CO2 prices. According to the EU Environment Commissioner, the 2.08 billion tonnes cap will lead to “a robust market with real emission reductions, which will constitute an important contribution to meeting the EU Kyoto target”.

However, many carbon market experts consider that the carbon market uncertainty and CO2 prices of the first trading period will limit investments in clean energy power sources in the second period. Current projections put the carbon price at €23/per tonne. But carbon traders say that the market will not be able to stimulate investment in low-carbon technologies, or reduce greenhouse gas emissions effectively until the CO2 price tag reaches between €40 and €50 per tonne.

In addition, some studies highlight the risk of a large influx of cheap of Kyoto mechanism credits (Certified Emission Reductions – CERs, and Emmission Reduction Units – ERUs). This could lead to the collapse of the EU ETS market and hinder any efforts to achieve domestic emission cuts and promote renewable energy investments in Europe.

In a related development, the European Commission announced it had agreed on a mechanism to link the EU ETS to similar trading schemes in Norway, Iceland and Liechtenstein.

Related documents:
Press releases on NAPS for Bulgaria and Romania
Carbon Trust Study: EU ETS Phase II allocation: implications and lessons
Open Europe Study: Europe’s Dirty Secret: Why the EU Emissions Trading Scheme isn’t working