European Union Emissions Trading System

The total number of permits issued (either auctioned or allocated) determines the supply for the allowances. The actual price is determined by the market. Too many allowances compared to demand will result in a low carbon price, and reduced emission abatement efforts.[38] Too few allowances will result in a high carbon price.[39]

For each EU ETS Phase, the total quantity to be allocated by each Member State is defined in the National Allocation Plan (equivalent to its UNFCCC-defined carbon account). The European Commission has oversight of the NAP process and decides if the NAP fulfills the twelve criteria set out in the Annex III of the Emission Trading Directive (EU Directive 2003/87/EC). The first and foremost criterion is that the proposed total quantity is in line with a Member State's Kyoto target.

Of course, the Member State's plan can, and should, also take account of emission levels in other sectors not covered by the EU ETS, and address these within its own domestic policies. For instance, transport is responsible for 21% of EU greenhouse gas emissions, households, and small businesses for 17% and agriculture for 10%.[40]

During Phase I, most allowances in all countries were given freely (known as grandfathering). This approach has been criticized[41] as giving rise to windfall profits, being less efficient than auctioning, and providing too little incentive for innovative new competition to provide clean, renewable energy.[42][43] On the other hand, allocation rather than auctioning may be justified for a few sectors that face international competition like the aluminium and steel industries.[44][45]

To address these problems, the European Commission proposed various changes in a January 2008 package, including the abolishment of NAPs from 2013 and auctioning a far greater share (ca. 60% in 2013, growing afterward) of emission permits.

From the start of Phase III (January 2013) there will be a centralized allocation of permits, not National Allocation Plans, with a greater share of auctioning of permits.[46]

Allocation can act as a means of addressing concerns over loss of competitiveness, and possible "leakage" (carbon leakage) of emissions outside the EU. Leakage is the effect of emissions increasing in countries or sectors that have weaker regulation of emissions than the regulation in another country or sector.[47] Such concerns affect the following sectors: cement, steel, aluminium, pulp and paper, basic inorganic chemicals and fertilisers/ammonia.[45] Leakage from these sectors was thought to be under 1% of total EU emissions. Correcting for leakage by allocating permits acts as a temporary subsidy for affected industries, but does not fix the underlying problem. Border adjustments would be the economically efficient choice, where imports are taxed according to their carbon content.[38][44] One problem with border adjustments is that they might be used as a disguise for trade protectionism.[48] Some adjustments may also not prevent emissions leakage.

Within a certain trading period, banking and borrowing is allowed. For example, a 2006 EUA can be used in 2007 (banking) or in 2005 (borrowing). Interperiod borrowing is not allowed. Member states had the discretion to decide whether banking EUAs from Phase I to Phase II was allowed.[49]

The EU ETS operates in 30 countries: the 27 EU member states plus Iceland, Liechtenstein and Norway.[50]

The United Kingdom left the EU on 31 January 2020 but remained subject to EU rules until 31 December 2020. The UK Emissions Trading Scheme (UK ETS) replaced the UK's participation in the EU ETS on 1 January 2021,[51] but the UK government required organisations to continue to comply with their existing obligations under the 2020 scheme year, which ended on 30 April 2021.[52]

The EU ETS is linked to the Swiss Emissions Trading System since 1 January 2020.[53] Linking systems creates a larger carbon market, which can reduce overall compliance costs, increase market liquidity and generate a more stable carbon market.[54][55] Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions.[56] Some scholars have argued that linking may provide a starting point for developing a new, bottom-up international climate policy architecture whereby multiple unique systems successively link their various systems.[57][58][59]

The ETS, in which all 15 Member States that were then members of the European Union participated, nominally commenced operation on 1 January 2005, although national registries were unable to settle transactions for the first few months. However, the prior existence of the UK Emissions Trading Scheme meant that market participants were already in place and ready. In its first year, 362 million tonnes of CO₂ were traded on the market for a sum of €7.2 billion, and a large number of futures and options.[61]

The price of allowances increased more or less steadily to a peak level in April 2006 of about €30 per tonne CO₂.[62] In late April 2006, a number of EU countries (the Netherlands, the Czech Republic, Belgium, France, and Spain) announced that their verified (or actual) emissions were less than the number of allowances allocated to installations. The spot price for EU allowances dropped 54% from €29.20 to €13.35 in the last week of April 2006. In May 2006, the European Commission confirmed that verified CO₂ emissions were about 80 million tonnes or 4% lower than the number of allowances distributed to installations for 2005 emissions.[63] In May 2006, prices fell to under €10/tonne. Lack of scarcity under the first phase of the system continued through 2006 resulting in a trading price of €1.2 per tonne in March 2007, declining to €0.10 in September 2007. In 2007, carbon prices for the trial phase dropped to near zero for most of the year. Meanwhile, prices for Phase II remained significantly higher throughout, reflecting the fact that allowances for the trial phase were set to expire by 31 December 2007.[64]

Verified emissions showed a net increase over the first phase of the scheme. For the countries for which data was available, emissions increased by 1.9% between 2005 and 2007 (at the time all 27 member states minus Romania, Bulgaria, and Malta).

Country	Verified emissions			Change
	2005	2006	2007	2005–2007
Austria	33,372,826	32,382,804	31,751,165	−4.9%
Belgium	55,363,223	54,775,314	52,795,318	−4.6%
Cyprus	5,078,877	5,259,273	5,396,164	6.2%
Czech Republic	82,454,618	83,624,953	87,834,758	6.5%
Germany	474,990,760	478,016,581	487,004,055	2.5%
Denmark	26,475,718	34,199,588	29,407,355	11.1%
Estonia	12,621,817	12,109,278	15,329,931	21.5%
Spain	183,626,981	179,711,225	186,495,894	1.6%
Finland	33,099,625	44,621,411	42,541,327	28.5%
France	131,263,787	126,979,048	126,634,806	−3.5%
Greece	71,267,736	69,965,145	72,717,006	2.0%
Hungary	26,161,627	25,845,891	26,835,478	2.6%
Ireland	22,441,000	21,705,328	21,246,117	−5.3%
Italy	225,989,357	227,439,408	226,368,773	0.2%
Lithuania	6,603,869	6,516,911	5,998,744	−9.2%
Luxembourg	2,603,349	2,712,972	2,567,231	−1.4%
Latvia	2,854,481	2,940,680	2,849,203	−0.2%
Netherlands	80,351,288	76,701,184	79,874,658	−0.6%
Poland	203,149,562	209,616,285	209,601,993	3.2%
Portugal	36,425,915	33,083,871	31,183,076	−14.4%
Sweden	19,381,623	19,884,147	15,348,209	−20.8%
Slovenia	8,720,548	8,842,181	9,048,633	3.8%
Slovakia	25,231,767	25,543,239	24,516,830	−2.8%
United Kingdom	242,513,099	251,159,840	256,581,160	5.8%
Total	2,012,043,453	2,033,636,557	2,049,927,884	1.9%

Consequently, observers accused national governments of abusing the system under industry pressure, and urged far stricter caps in the second phase (2008–2012).[66] This led to a stricter regime in the second phase.

The second phase (2008–12) expanded the scope of the scheme significantly. In 2007, three non-EU members, Norway, Iceland, and Liechtenstein joined the scheme.[67] The EU's "Linking Directive" introduced the CDM and JI credits. Although this was a theoretical possibility in phase I, the over-allocation of permits combined with the inability to bank them for use in the second phase meant it was not taken up.[68]

During Phases I and II, allowances for emissions have typically been given free to firms, which has resulted in them getting windfall profits.[69] Ellerman and Buchner (2008) suggested that during its first two years in operation, the EU-ETS turned an expected increase in emissions of 1–2% per year into a small absolute decline. Grubb et al. (2009) suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50–100 MtCO₂ per year, or 2.5–5%.[70]

On 27 April 2012, the European Commission announced the full activation of the EU Emissions Trading System single registry. The full activation process included the migration of over 30,000 EU ETS accounts from national registries. The European Commission further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS.[71]

Phase II saw some tightening, but the use of JI and CDM offsets was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap.[69] For Phase II, the cap is expected to result in an emissions reduction in 2010 of about 2.4% compared to expected emissions without the cap (business-as-usual emissions).[72]

Aviation emissions were to be included from 2012.[73] The inclusion of aviation was considered important by the EU.[74] The inclusion of aviation was estimated to increase in demand for allowances by about 10–12 million tonnes of CO₂ per year in phase two. According to DEFRA, an increased use of JI credits from projects in Russia and Ukraine, would offset any increase in prices so there would be no discernible impact on average annual CO₂ prices.[75]

The airline industry and other countries including China, India, Russia, and the United States reacted adversely to the inclusion of the aviation sector.[76] The United States and other countries argued that the EU did not have jurisdiction to regulate flights when they were not in European skies; China and the United States threatened to ban their national carriers from complying with the scheme. On 27 November 2012 the United States enacted the European Union Emissions Trading Scheme Prohibition Act of 2011 which prohibits U.S. carriers from participating in the European Union Emission Trading Scheme.[77][78] China threatened to withhold $60 billion in outstanding orders from Airbus, which in turn led to France pressuring the EU to freeze the scheme.[79]

The EU insisted that the regulation should be applied equally to all carriers, and that it did not contravene international regulations. In the absence of a global agreement on airline emissions, the EU argued that it was forced to go ahead with its own scheme. But only flights within the EEA are covered; international flights are not.[23]

Ultimately, the Commission intended that the third trading period should cover all greenhouse gases and all sectors, including aviation, maritime transport, and forestry.[80] For the transport sector, the large number of individual users adds complexities, but might be implemented either as a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers.[81]

The National Allocation Plans for Phase II, the first of which were announced on 29 November 2006, provided for an average reduction of nearly 7% below the 2005 emission levels.[82] However, the use of offsets such as Emission Reduction Units from JI and Certified Emission Reductions from CDM projects was allowed, with the result that the EU would be able to meet the Phase II cap by importing units instead of reducing emissions (CCC, 2008, pp. 145, 149).[83]

According to verified EU data from 2008, the ETS resulted in an emissions reduction of 3%, or 50 million tons. At least 80 million tons of "carbon offsets" were bought for compliance with the scheme.[84]

In late 2006, European Commission started infringement proceedings against Austria, Czech Republic, Denmark, Hungary, Italy and Spain, for failure to submit their proposed National Allocation Plans on time.[85]

In July 2020, The Environment Committee of the European Parliament voted to include CO₂ emissions from the maritime sector in the European Union (EU) Emissions Trading System (ETS).[86]

The annual Member State CO₂ yearly allowances in million tonnes are shown in the table:

Million tonnes of CO₂ yearly allowances[87]

Member State	1st period cap	2005 verified emissions	2008–2012 cap
			State request	Cap allowed
Austria	33.0	33.4	32.8	30.7
Belgium	62.1	55.58[lower-alpha 1]	63.33	58.5
Bulgaria	42.3	40.6	67.6	42.3
Cyprus[lower-alpha 2]	5.7	5.1	7.12	5.48
Czech Republic	97.6	82.5	101.9	86.8
Denmark	33.5	26.5	24.5	24.5
Estonia	19	12.62	24.38	12.72
Finland	45.5	33.1	39.6	37.6
France	156.5	131.3	132.8	132.8
Hungary	31.3	26.0	30.7	26.9
Germany	499	474	482	453.1
Greece	74.4	71.3	75.5	69.1
Ireland	22.3	22.4	22.6	21.15
Italy	223.1	222.5	209	195.8
Latvia	4.6	2.9	7.7	3.3
Lithuania	12.3	6.6	16.6	8.8
Luxembourg	3.4	2.6	3.95	2.7
Malta[lower-alpha 2]	2.9	1.98	2.96	2.1
Netherlands	95.3	80.35[lower-alpha 3]	90.4	85.8
Poland	239.1	203.1	284.6	208.5
Portugal	38.9	36.4	35.9	34.8
Romania	74.8	70.8	95.7	75.9
Slovakia	30.5	25.2	41.3	30.9
Slovenia	8.8	8.7	8.3	8.3
Spain	174.4	182.9	152.7	152.3
Sweden	22.9	19.3	25.2	22.8
United Kingdom	245.3	242.4[lower-alpha 4]	246.2	246.2
Totals	2298.5	2122.16	2325.34	2080.93

The carbon price[88] within Phase II increased to over €20/tCO₂ in the first half of 2008 (CCC, 2008, p. 149). The average price was €22/tCO₂ in the second half of 2008, and €13/tCO₂ in the first half of 2009. CCC (2009, p. 67) gave two reasons for this fall in prices:[89]

• Reduced output in energy-intensive sectors as a result of the recession. This means that less abatement will be required to meet the cap, lowering the carbon price.
• The market perception of future fossil fuel prices may have been revised downwards.

Projections made in 2009 indicate that like Phase I, Phase II would see a surplus in allowances and that 2009 carbon prices were being sustained by the need to "bank" allowances to surrender them in the tougher third phase.[48] In December 2009, carbon prices dropped to a six-month low after the Copenhagen climate summit outcome disappointed traders. Prices for EU allowances for December 2010 delivery dropped 8.7% to 12.40 euros a tonne.[90]

In March 2012, according to the periodical Economist, the EUA permit price under the EU ETS had "tanked" and was too low to provide incentives for firms to reduce emissions. The permit price had been persistently under €10 per tonne compared to nearly €30 per tonne in 2008. The market had been oversupplied with permits.[91] In June 2012, EU allowances for delivery in December 2012 traded at 6.76 euros each on the Intercontinental Exchange Futures Europe exchange, a 61 percent decline compared with a year previously.[92]

In July 2012, Thomson Reuters Point Carbon stated that it considered that without intervention to reduce the supply of allowances, the price of allowances would fall to four Euros.[93] The 2012 closing price for an EU allowance with a December 2013 contract ended the year at 6.67 euros a tonne.[94] In late January 2013, the EU allowance price fell to a new record low of 2.81 euros after the energy and industry committee of the European parliament opposed a proposal to withhold 900 million future-dated allowances from the market.[95]

On 22 January 2014, the European Commission proposed two structural reform amendments to the ETS directive (2003/87/EC) of the 2008 Climate Package to be agreed on in the Council Conclusions[104] on 20–21 March 2014 by the Heads of EU Member States at the meeting of the European Council:[105]

• the linear reduction factor, at which the overall emissions cap is reduced, from 1.74% (2013–2020) to 2.2% each year from 2021 to 2030, thus reducing EU CO₂ emissions in the ETS sector by 43% compared to 2005[106]
• the creation of a 12% "automatic set-aside" reserve mechanism of verified annual emissions (at least a 100 million CO₂ permit reserve) in the fourth ETS period from 2021 to 2030, thus creating a quasi carbon tax or "carbon price floor" with a price range set each year by the European Commission's Directorate General for Climate Change[107]

Connie Hedegaard, the EU Commissioner for Climate Change, hoped "to link up the ETS with compatible systems around the world to form the backbone of a global carbon market" with Australia cited as an example.[26] However, as the COP 19 Climate Conference again ended with no binding new international agreement in 2013, and after the election of the Liberal-National government, Australia dismantled its ETS system.[108]

Before the European Council summit on 20 March 2014,[109] the European Commission decided to propose a change in the functioning of the carbon market (CO₂ permits). The submitted legislation on the Market Stability Reserve system (MSR) would change the amount of annually auctioned CO₂ permits based on the amount of CO₂ permits in circulation.[110] On 24 October 2014, at the meeting of the European Council, the Heads of Governments of EU Member States provided legal certainty to the proposed Market Stability Reserve (MSR) by sanctioning the political project in the text of the Council Conclusions.[111] This would address imbalances in supply and demand in the European carbon market by adjusting volumes for auction. The reserve would operate on predefined rules with no discretion for the commission or Member States.

The European Parliament and the European council informally agreed on an adapted version of this proposal, which sets the starting date of the MSR to 2019 (so already in Phase III), puts the 900 million backloaded allowances in the reserve and reduces the reaction time of the MSR to one year. The adopted proposal was passed as Decision (EU) 2015/1814[27] by the European parliament and the Council of ministers in 2015.[28]

In the years 2014–2017, the back-loading of auction volumes and the legislation on introducing the MSR had neither substantially decreased the surplus of allowances nor substantially increased allowance prices in the EU-ETS, with EUA prices remaining below €10/tCO₂. In 2018, the MSR was reformed again with Directive (EU) 2018/410,[30] primarily to reduce the surplus of emissions allowances and create additional scarcity:[112][113]

• For the period from 2019 to 2023, the share of allowances put into the MSR was increased from 12% to 24%
• From 2023 onwards, all allowances in the MSR above the total number of allowances auctioned during the previous year would become invalid
• Unilateral invalidation of allowances by member states that take additional policy measures leading to reduced demand for EUAs.

This reform lead to a strong increase of EUA prices in 2018, with prices staying mostly in a range of €18-30/tCO₂ from August 2018 to March 2020.

The change in the overall EU emissions target to –55% reduction versus 1990 in the European Green Deal necessitated tightening of the EU ETS reduction target for 2030 of –43% with respect to 2005. The EU commission proposed in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to –61% compared to 2005.[3] Such a tighter EU ETS target could increase scarcity of EUAs and thus raise EUA prices higher, with modeling studies estimating carbon prices in the range of €90-€130/tCO₂ for 2030.[114][115]

The EU commission also proposed to include emissions from maritime transport in the EU ETS.[3]

The 24 February 2022 invasion sent carbon prices plunging from €97 in early February down to below €70.[116]

On 19 January 2011, the EU emissions spot market for pollution permits was closed after computer hackers stole 28 to 30 million euros ($41.12 million) worth of emissions allowances from the national registries of several European countries within a few days time period. The Czech Registry for Emissions Trading was especially hard hit with 7 million euros worth of allowances stolen by hackers from Austria, the Czech Republic, Greece, Estonia, and Poland. A phishing scam is suspected to have enabled hackers to log into unsuspecting companies' carbon credit accounts and transfer the allowances to themselves, allowing them to then be sold.[120][121]

The European Commission said it would "proceed to determine together with national authorities what minimum security measures need to be put in place before the suspension of a registry can be lifted". Maria Kokkonen, EC spokeswoman for climate issues, said that national registries can be reopened once sufficient security measures have been enacted and member countries submit to the EC a report of their IT security protocol.

The Czech registry said there are still legal and administrative hurdles to be overcome and Jiri Stastny, chairman of OTE AS, the Czech registry operator, said that until there is recourse for victims of such theft, and a system is in place to return allowances to their rightful owners, the Czech registry will remain closed. Registry officials in Germany and Estonia have confirmed they have located 610,000 allowances stolen from the Czech registry, according to Mr. Stastny. Another 500,000 of the stolen Czech allowances are thought to be in accounts in the UK, according to the OTE.[120][121][122]

Cyber fraudsters have also attacked the EU ETS with a "phishing" scam which cost one company €1.5 million.[123] In response to this, the EU has revised the ETS rules to combat crime.[124]

The security breaches raised fears among some traders that they might have unknowingly purchased stolen allowances which they might later have to forfeit. The ETS experienced a previous phishing scam in 2010 which caused 13 European markets to shut down, and criminals cleared 5 million euros in another cross-border fraud in 2008 and 2009.[121]

In 2009 Europol informed that 90% market volume of emissions traded in some countries could be result of tax fraud, more specifically missing trader fraud, costing governments more than 5 billion euros.[125]

German prosecutors confirmed in March 2011 that value-added-tax fraud in the trade of carbon-dioxide emissions has deprived the German state of about €850 million ($1.19 billion). In December 2011 a German court sentenced six people to jail terms of between three years and seven years and 10 months in a trial involving evasion of taxes on carbon permits. A French court sentenced five people to one to five years in jail, and to pay massive fines for evading tax through carbon trading. In the UK a first trial over VAT fraud in the carbon market is put on track to start in February 2012.

The EU ETS has been criticized[131] for several points, including: over-allocation, windfall profits, price volatility, and in general for failing to meet its goals.[132] Proponents maintain, however, that Phase I of the EU ETS (2005–2007) was a "learning phase" designed primarily to establish baselines and create the infrastructure for a carbon market, not to achieve significant reductions.[133][134][135]

A number of design flaws have limited the effectiveness of the scheme.[72] In the initial 2005–07 period, emission caps were not tight enough to drive a significant reduction in emissions.[69] The total allocation of allowances turned out to exceed actual emissions. This drove the carbon price down to zero in 2007. This oversupply was caused because the allocation of allowances by the EU was based on emissions data from the European Environmental Agency in Copenhagen, which uses a horizontal activity-based emissions definition similar to the United Nations, the EU-ETS Transaction log in Brussels, but a vertical installation-based emissions measurement system. This caused an oversupply of 200 million tonnes (10% of market) in the EU-ETS in the first phase and collapsing prices.[136]

In addition, the EU ETS has been criticized as having caused a disruptive spike in energy prices.[137] Defenders of the scheme say that this spike did not correlate with the price of permits, and in fact the largest price increase occurred at a time (Mar–Dec 2007) when the cost of permits was negligible.[135]

Researchers Preston Teeter and Jorgen Sandberg have argued that it is largely the uncertainty behind the EU's scheme that has resulted in such a tepid and informal response by regulated organizations. Their research has revealed a similar outcome in Australia, where organizations saw little incentive to innovate and even comply with cap and trade regulations.[138]

Some critics in EU blamed the EU ETS for contributing to the 2021 global energy crisis.[139][140]

There was an oversupply of emissions allowances for EU ETS Phase I. This drove the carbon price down to zero in 2007 (CCC, 2008, p. 140).[83] This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap.[45] Given poor data about emissions baselines, inherent uncertainty of emissions forecasts, and the very modest reduction goals of the Phase I cap (1–2% across the EU), it was entirely expected that the cap might be set too high.[135]

This problem naturally diminishes as the cap tightens. The EU's Phase II cap is more than 6% below 2005 levels, much stronger than Phase I, and readily distinguishable from business-as-usual emissions levels.[135]

Over-allocation does not imply that no abatement occurred. Even with over-allocation, there was theoretically a price on carbon (except for installations that received hundreds of thousands of free allowances). For some installations, the price had some effect on emitters' behavior. Verified emissions in 2005 were 3–4% below projected emissions,[134] and analysis suggests that at least part of that reduction was due to the EU ETS.[141]

In September 2012, Thomson Reuters Point Carbon calculated that the first Kyoto Protocol commitment period had been oversupplied by about 13 billion tonnes (13.1 Gt) of CO₂ and that the second commitment period (2013–2020) was likely to start with a surplus of Assigned Amount Units (AAUs).[142]

According to Newbery (2009), the price of EUAs was included in the final price of electricity.[38] The free allocation of permits was cashed in at the EUA price by fossil generators, resulting in a "massive windfall gain". Newbery (2009) wrote that "[there] is no case for repeating such a willful misuse of the value of a common property resource that the country should own". In the view of 4CMR (2009), all permits in the EU ETS should be auctioned.[143] This would avoid possible windfall profits in all sectors.

The price of emissions permits tripled in the first six months of Phase I, collapsed by half in a one-week period in 2006, and declined to zero over the next twelve months. Such movements and the implied volatility raised questions about the viability of the Phase I system to provide stable incentives to emitters.[135]

In future phases, measures such as banking of allowances, auctioning, and price floors were considered to mitigate volatility.[144] However, it's important to note that considerable volatility is expected of this type of market, and the volatility seen is quite in line with that of energy commodities generally. Nonetheless, producers and consumers in those markets respond rationally and effectively to price signals.[135]

Newbery (2009) commented that Phase I of the EU ETS was not delivering the stable carbon price necessary for long-term, low-carbon investment decisions.[38] He suggested that efforts should be made to stabilize carbon prices, e.g., by having a price ceiling and a price floor. This led to the reforms outlined above in Phases II and III.

The EU ETS is "linked" to the Joint Implementation and Clean Development Mechanism projects as it allows the limited use of "offset credits" from them. Participating firms were allowed to use some Certified Emission Reduction units (CERs) from 2005 and Emission Reduction Units (ERUs) from 2008. Each Member State's National Allocation Plan must specify a percentage of the national allocation that will be the cap on the CERs and ERUs that may be used. CERs and ERUs from nuclear facilities and from Land Use, Land-Use Change and Forestry may not be used.[145]

The main theoretical advantage of allowing free trading of credits is that it allows mitigation to be done at least-cost (CCC, 2008, p. 160).[83] This is because the marginal costs (that is to say, the incremental costs of preventing the emission of one extra ton of CO₂e into the atmosphere) of abatement differs among countries. In terms of the UK's climate change policy, CCC (2008), noted three arguments against too great a reliance on credits:

• Rich countries need to demonstrate that a low-carbon economy is possible and compatible with economic prosperity. This is to convince developing countries to lower their emissions. Additionally, domestic action by rich countries drives investment towards a low-carbon economy.
• An ambitious long-term target to reduce emissions, e.g., an 80% cut in UK emissions by 2050, requires significant domestic progress by 2020 and 2030 to reduce emissions.
• CDM credits are inherently less robust than a cap and trade system, where reductions are required in total emissions.

Due to the economic downturn, states have pushed successfully for a more generous approach towards the use of CDM/JI credits post-2012.[146] The 2009 EU ETS Amending Directive states that credits can be used for up to 50% of the EU-wide reductions below the 2005 levels of existing sectors over the period 2008–2020.[147] Moreover, it has been argued that the volume of CDM/JI credits, if carried over from phase II (2008–2012 to phase III 2013–2020) in the EU ETS will undermine its environmental effectiveness, despite the requirement of supplementarity in the Kyoto Protocol.[148]

In January 2011, the EU Climate Change Committee banned the use of CDM Certified Emission Reduction units from HFC-23 destruction in the European Union Emissions Trading Scheme from 1 May 2013. The ban includes nitrous oxide (N2O) from adipic acid production. The reasons given were the perverse incentives, the lack of additionality, the lack of environmental integrity, the under-mining of the Montreal Protocol, costs and ineffectiveness and the distorting effect of a few projects in advanced developing countries getting too many CERs.[149]

As an alternative to CDM and JI projects, emissions can be offset directly by buying and deleting emissions allowances inside the ETS. This is a way to avoid several problems of CDM and JI such as additionality, measurement, leakage, permanence, and verification.[150] Buying and cancelling allowances allows to include more emissions sources in the ETS (such as traffic). Furthermore, it reduces the available allowances in the cap-and-trade system, which means that it reduces the emissions that can be produced by covered sources.[151]