ABSTRACT
This chapter aims to elucidate the Emissions Trading System (ETS) debate by offering an analytical framework with clear definitions of key concepts and referring to empirical findings. This framework is an anatomy of ETS, based on the economic ideas and propositions commonly used by ETS proponents. The anatomy represents the essential parts and projected functioning of the market-based environmental policy instrument ‘emissions trading’. This explains the central position of pricing and the announced results of pricing policies, in particular price induced technological innovation to attain lower abatement expenses. The EU ETS exemplar is a hybrid of free permit allocations moderated via specific benchmarks for Emissions Intensive Trade Exposed (EITE) activities and increasing auctioning of permits for the electric power generation sector. Second, the two conflicting policy goals pursued by the EU cannot be met with a single ETS exemplar. Finally, a high-cost ETS exemplar is unlikely to substitute for the presently prevailing, industry interests serving exemplar.
