Note: Cover -- Half-title -- Title -- Copyright -- Contents -- Figures -- Tables -- Boxes -- Appendices -- Frequently used abbreviations -- Preface -- 1 Introduction -- Outline of the book -- 2 Origins and development of the EU ETS -- Introduction -- The European Union and the environment: legislative and institutional context -- The intellectual and experiential platform -- Theoretical foundations -- The US experience with emissions trading -- The European intellectual platform -- The political foundations of the EU ETS -- The failure of the carbon energy tax proposal -- The Kyoto negotiations -- The emergence of emissions trading in the European Union -- The burden-sharing agreement and the Kyoto-EU-ETS link -- Early action by member states -- The Green Paper -- The EU ETS Directive -- The Linking Directive -- Leadership and people matter -- Some conclusions and implications -- 3 Allowance allocation -- Introduction -- A unique feature of cap-and-trade systems -- Allocation in the EU ETS -- Cap-setting in the first compliance period -- Conditions of implementation -- Modest ambition and emissions uncertainty -- Poor data -- Impossible deadlines -- Co-ordination and guidance -- Results -- Cap-setting in the second compliance period, 2008-12 -- Conditions of implementation -- Co-ordination and guidance -- Results -- The allocation of member state totals to installations -- Auctioning and grandfathering -- Benchmarking and recent historical emissions -- New entrant and closure provisions -- Assignment of shortage to power sector and emergence of trade exposure as a basis for allocation -- The post-2012 changes in allocation -- Auctioning -- Harmonization -- Cap-setting -- Concluding observations -- 4 Effects of free allocation -- Introduction -- Price effects and allocation effects -- Financial and operational effects -- Effects on the extent of trading. , Introduction -- The extent of trading in the EU ETS -- Summary: what explains these flows? -- Effects on short-term profitability and competitiveness -- The refining sector as a case study of financial effects -- Can inter-refinery allocation differences be reduced? -- Could allocation determine production? -- Allocation and coal plant utilization in Spain -- Investment effects of allocation: new entrant and closure provisions -- Why the long-term effects are different -- Can investment effects be detected? -- Concluding observations -- 5 Market development -- Introduction -- A self-contained first period with full intra-period 'banking' and 'borrowing' -- Institutional development -- The players in the EUA market -- The real compliance actors: firms -- Financial intermediaries -- Types of transactions -- Bilateral transactions -- Over-the-counter transactions -- Transactions on organized exchanges -- Trading products -- Cash or spot contracts -- Forward or futures contracts -- More exotic contracts: swaps and options -- Transaction volumes -- EUA price development -- Great uncertainty in the initial stage (January 2005-April 2006) -- The information shock and the calibration of expectations (April 2006-October 2006) -- The total disconnection between first-and second-period prices (October 2006 onwards) -- A comment on second-period pricing -- Carbon price drivers -- Data releases and regulatory influences -- Energy prices -- Weather conditions -- The relationship between EUAs of different maturities -- Volatility -- Ex post evidence of the extent of trading -- Trading relationships between EU ETS installations -- A truly international market -- Conclusions -- 6 Emissions abatement -- Introduction -- Macro estimates -- An EU-wide estimate -- The geographic distribution of abatement -- Abatement through fuel-switching. , The highly variable potential for fuel-switching -- Simulation modelling of abatement through fuel-switching -- Abatement in the UK power sector -- Anecdotal evidence -- Conclusions -- 7 Industrial competitiveness -- Introduction -- Cement -- How cement is produced -- CO2 emissions and opportunities for abatement -- Economic environment -- Evaluation of the impact of the EU ETS on the competitiveness of the European cement industry -- Ex ante studies -- Ex post analysis -- Conclusion: no observed impact on the cement sector during the first trading period -- Iron and steel -- How steel is produced -- CO2 emissions and opportunities for abatement -- The global economic environment of the steel sector -- Evaluation of the impact of the EU ETS on the competitiveness of the European steel industry -- Ex ante studies -- Ex post analysis -- Conclusion: no observed impact on the iron and steel sector during the first trading period -- Oil-refining -- How oil is refined -- CO2 emissions and opportunities for abatement -- Economic environment -- Evaluation of the impact of the EU ETS on the competitiveness of the European refining industry -- Ex ante simulations -- Ex post analysis -- A survey of the refining industry: perspectives on competitiveness -- Conclusion: no observed impact on the refining sector during the first trading period -- Aluminium -- How aluminium is produced -- CO2 emissions and opportunities for abatement -- Economic environment -- Evaluation of the impact of the EU ETS on the competitiveness of the European aluminium industry -- Ex ante studies -- Ex post assessments -- Conclusion: no observed impact on the aluminium sector during the first trading period -- Competitiveness impacts and leakage: only preliminary conclusions -- 8 Costs -- Introduction -- Defining cost -- Ex ante evaluations of the costs of the EU ETS -- Ex post evidence. , Transaction costs -- Survey methodology -- Findings -- Early-implementation costs -- Monitoring, reporting and verification costs -- Trading costs -- Summary of first-period transaction costs -- Conclusions -- 9 Linkage and global implications -- Introduction -- Enlarging the scope -- Including additional installations, sectors and gases -- The permanent opt-in provision -- The temporary opt-out provision -- Integrating a new sector: the inclusion of aviation during the second trading period -- Expanding the geographic scope of the scheme -- Bulgaria and Romania: new member states and trading partners -- Incorporating the nations of the European Economic Area -- Synthesis: a 22 per cent expansion of the EU ETS cap by 2012 -- Using project-based mechanisms to establish links: the rules -- The EU ETS Linking Directive -- The role of the EU ETS in the world carbon market -- The CER market -- CER price relationships -- The other side of the CER market: emissions reductions in developing nations -- Expanding emissions coverage in developed nations and inside the European Union -- Conclusion: what are the next steps? -- 10 Conclusions -- CO2 emissions are no longer free -- Allocation is controversial -- A liquid and sophisticated market emerged -- Abatement occurred -- Competitiveness and cost effects were small -- Annex: The interaction between the EU ETS and European electricity markets -- Introduction -- Overview of the European electricity sector -- The production mix -- The special role of the power sector in the EU ETS -- How electricity markets work -- The general role of CO2 allowances in electricity prices -- The formation of carbon and electricity prices -- The long-run carbon-electricity hypotheses -- The short-run electricity-carbon hypotheses -- The short-run fuel-switching hypothesis -- The econometric evidence. , Summarizing the causality relationships -- Market manipulation -- Rents generated by the EU ETS for European power producers -- The question of pass-through -- Rents and windfall profits -- Calculating type I rents -- Conclusions -- Appendix A: Sequence of events in the development of the EU ETS and Linking Directives -- Appendix B: Data tables -- Bibliography -- Index.