ABSTRACT
The primary objective of the European Union Emissions Trading Scheme (EU ETS) is to regulate carbon dioxide (CO
emissions from the most energy-intensive
industry sectors. Installations have to surrender as many allocated allowances as their previous year’s emissions. By allowing the emergence of a price, or European Union Allowance (EUA), for each ton of CO
sending price signals to industry operators. The latter can select a combination of capital investments, operating practices and emissions releases to minimize their total abatements costs and allowance expenses. The main characteristic of such cap-and-trade systems is that firms have the freedom to decide on their own abatement strategies, based on their risk preferences and perceptions of regulatory uncertainties, and available technical opportunities (i.e. in terms of fuel-switching).
