Happy Birthday: Twenty Years of the EU ETS

Abstract

Twenty years after its launch, the European Union Emissions Trading System (EU ETS) stands as the world's largest and most mature carbon market. The ETS has developed, from generous allowance allocation and initial price collapse to the introduction of the Market Stability Reserve, enabling more effective emissions reductions. Drawing on major reviews and recent empirical studies shows that the system decreased emissions, limited carbon leakage, and facilitated low-carbon innovation, especially in the power sector. The system evolved from a pure cap-and-trade to a hybrid instrument that adjusted the allowance supply to stabilize prices and functions within a broader policy ecosystem, which influences its effectiveness. However, the EU ETS still faces challenges: decarbonizing heavy industry, considering transport and building, phasing out free allocation, managing social impacts, and more. The EU ETS can teach us to design politically feasible carbon pricing systems that are durable.