The challenge
Europe needed to cut emissions from power plants and heavy industry.
The case
Launched in 2005, the EU Emissions Trading System caps emissions from power stations, factories and aviation within Europe, and lets companies buy and sell permits under the cap. For its first decade, too many free permits and the 2008 recession caused a glut, and prices were often too low to change behavior. Reforms, including a reserve that removes surplus permits from 2019, pushed prices up sharply. According to the European Commission, emissions under the system fell 15.5% in 2023 alone, leaving them around 47% below 2005 levels.
Why it worked
A cap-and-trade system only works when the cap is tight enough to make permits valuable. The EU's willingness to fix its early design flaws is what turned it into a success.
Sources
- European Commission (2024). Record reduction of 2023 ETS emissions due largely to boost in renewable energy.
- European Commission: EU Emissions Trading System (EU ETS).
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