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Trading up
The future of emissions trading
Brief  December 2009
Over the last year, debate has grown over how effective 
the EU Emissions Trading Scheme (EU ETS) is and whether 
it should remain the cornerstone of UK climate change 
policy and be a model for other major economies. This brief 
explains why the CBI continues to believe that it should, 
but also sets out the limitations to emissions trading. It 
concludes with six key steps that must be taken if EU ETS is to 
deliver on its potential.
What emissions trading can do:
•  Guarantee that the level of emissions cuts chosen by 
politicians will be delivered at minimum cost
•  Provide a signal that there will be a long-term market for 
carbon reductions as well as a daily incentive to optimise 
lower carbon options
•  Protect the competitiveness of internationally exposed, 
carbon-intensive industry
•  Ensure aviation emissions cannot threaten overall 
carbon targets
•  Provide the best basis for building international 
cooperation on climate change by linking regional 
schemes to create a global carbon market
•  Strengthen London’s role as the world’s leading 
carbon trading centre
Guarantee the level of emissions cuts chosen are delivered 
at minimum cost across sectors covered by the EU ETS
There are two principal benefits of ‘cap and trade’ schemes 
such as the EU ETS. First, once a legally binding cap on 
permits issued under the scheme has been set by the 
political process, those emission cuts are essentially ‘locked 
in’. Second, the trading element guarantees that the cuts 
will come from the lowest cost options across the sectors 
covered by the scheme. No alternative policy combines these 
two advantages. For example while a carbon tax should also 
encourage firms to invest in the cheapest abatement options, 
there would be no way of knowing in advance what level of 
emission cuts would result from the level of tax chosen.
Murray Birt | senior policy adviser | CBI
email: murray.birt@cbi.org.uk
British business is committed to effective action to cut carbon emissions 
and so reduce the risk of climate change. Cutting emissions brings business 
opportunities, but also incurs costs for business and consumers. The need to 
combine emissions cuts with cost-effectiveness is at the heart of the CBI’s 
support for emissions trading. 

2Trading up The future of emissions trading
The level of emissions cuts which EU ETS guarantees by 2020 has 
been set at 21% below 2005 emissions levels. This cut is the least that 
will be delivered: if the EU decides as part of an international climate 
agreement to make deeper overall emissions cuts it may tighten the EU 
ETS cap to a 30% reduction by 2020.
Critics of EU ETS sometimes point out that because international 
carbon credits approved by the UN (Clean Development Mechanism 
and Joint Implementation credits) can be used (subject to numerical 
limits) within EU ETS, the emissions cuts guaranteed by each EU ETS 
phase may not all happen in the EU. Whether such credits can be 
used, and if so how many, is one of the political choices made for each 
phase of EU ETS. The benefits of allowing such credits are that they 
provide an embryonic link between the EU market and other potential 
carbon markets, that they enable a flow of funds creating ‘climate 
entrepreneurs’ aiming to reduce carbon emission in the developing 
world, and that they reduce the overall cost of cutting global emissions.
These benefits contribute to the development of a global carbon price 
and allow the market to find the optimal path to global reductions in 
CO2 emissions. The CBI position has always been that these benefits 
warrant the use of some international credits within EU ETS, provided 
such credits are subject to rigorous UN-based quality control, and that 
in line with the principle of supplementarity that international credits 
only account for up to half of emissions reductions within EU ETS.
Provide a long-term market signal for low carbon innovation
The cap on emissions is a powerful signal to business to reduce 
emissions as the number of allowances available declines over time. 
Hence firms which wish to maintain or grow their output over the 
medium term know that if they do not reduce their carbon intensity 
they risk chasing an ever-diminishing (and probably ever more 
expensive) pool of allowances. This creates demand for low-carbon 
technologies. The ‘spot’ and ‘future’ carbon price created by the EU ETS 
is also a signal to choose low-carbon technologies that are currently 
commercial. A 2009 survey of companies involved in the carbon 
market found that around 70% of businesses1 said that the price of 
carbon has influenced their investment decisions.
Some critics have attempted to link concerns about the recent banking 
crisis and governance in the financial sector with carbon trading. Such 
concerns are overstated and distract from efforts to build international 
carbon markets. The financial sector has become involved in carbon 
markets to assist other companies which do not have the expertise 
or capacity to directly participate in the market. The financial sector 
also participates in bringing capital to invest in emission reducing 
technologies due to the cost of carbon creating the appropriate 
incentive. Carbon trading uses similar market instruments (such as 
spot, exchange and futures) as trading in other commodities like 
wheat, gold or coffee. These simple trading tools have been used 
for decades through many economic cycles without causing crises. 
Proposals (either in the EU or the US) to restrict the participation of 
the financial sector in the carbon market would greatly undermine the 
benefits of carbon markets.
Protect the competitiveness of internationally exposed, 
carbon-intensive industry
Cap and trade policies can be adjusted to reduce the risk of so-called 
‘carbon leakage’ – ie when energy intensive businesses exposed to 
international competition, shift investment or production outside 
the EU due to the cost of climate policies that their international 
competitors do not face. To enable carbon cuts to be delivered with 
reduced business competitiveness impacts, during phase 2 of the EU 
ETS most of the reduction requirements were allocated to the power 
sector which is less subject to international competition than other 
sectors.
For post-2012, free allocation will be provided to sectors with high 
amounts of international trade and that are carbon intense. Where 
possible, free allocation will be distributed using benchmarks based 
on the 10% most efficient installation in that sector. As well, member 
states will be allowed under new state aid rules to partially compensate 
electricity intensive industry (such as aluminium, chlor-alkali, and 
electric arc steel making) from the carbon cost pass through in power 
prices. Industry that does not face similar competitiveness risks will 
rightly face higher amounts of auctioning over time.
Free allocation is a better approach for addressing competitiveness 
impacts than border tariffs, which risk undermining the EU’s position 
as a staunch advocate of free trade and could lead to tariff reprisals. 
Addressing competitiveness issues under a carbon tax system would 
require provisions that might have a similar level of complexity as 
the EU ETS provisions but might lack the transparency of the free 
allocation, compensation and benchmarking approaches.
The US origins of emissions trading
While Europe currently has the world’s largest carbon market, 
the cost effectiveness of emissions trading was proven in the US 
which used cap and trade to reduce sulphur dioxide emission 
by 43% between 1990 and 2007 at a cost that was 75% lower 
than estimates when the target was set. But the US cap and trade 
systems for air pollutants only targeted emissions from electricity 
generation and not industrial emitters and so therefore did not 
face competitiveness concerns which the EU ETS must address.

3Trading up The future of emissions trading
Ensure aviation emissions cannot threaten overall carbon targets
 While reducing aviation emissions is difficult, the Advisory Council for 
Aeronautical Research in Europe (ACARE) has set targets for aircraft 
manufacturers to bring forward technologies to reduce CO2, NOx and 
noise emissions by 50% per passenger kilometre for a new aircraft 
produced in 2020 compared with a similar one produced in 2000. 
With fewer technological options for reducing carbon emissions from 
aviation compared with other sectors, some fear that the projected 
growth in aviation emissions will make national and EU emissions 
targets impossible to meet. EU ETS offers a way to address this 
threat. Starting in 2012, all greenhouse gas emissions from airlines 
flying to and within Europe will be part of the overall declining cap on 
emissions. While airlines will be allocated free allowances equivalent 
to most of their historical emissions levels, to maintain or increase 
emissions at or above 2005 levels they will have to purchase emissions 
from the declining numbers issued each year. They will be able to do 
so only if they pass on to passengers an increase in ticket prices high 
enough to enable them to outbid other sectors at EU ETS allowance 
auctions. It is by no means clear that this will happen, but if so it 
suggests that the economic value society places on air travel is such 
that it should account for the majority of the ‘carbon budget’ the UK will 
have left as it progresses towards an 80% carbon reduction target.
Provides the best basis for building international cooperation 
on climate change
Many countries are opposed to efforts to harmonise taxation levels 
because it would infringe on national sovereignty. This is therefore 
a barrier to using carbon taxes as the basis for international climate 
policy. The EU ETS itself links carbon policies in 27 countries (EU 
member states) and has created the largest carbon market in the 
world. The Clean Development Mechanism (CDM) creates indirect 
links between many national carbon markets and this facilitates 
international carbon investment flows to enable a global solution to a 
global problem.
Strengthen London’s role as the world’s leading carbon trading centre
London is the global centre of carbon trading, being the location of over 
75% of all carbon market trading desks and housing 80% of all carbon 
market brokering firms. Based in the heart of the City, the European 
Climate Exchange is the most liquid carbon marketplace in Europe 
with more than 90 global businesses signing up to trade emissions 
products, serving several thousand clients around the world. In 2008 
annual volumes increased 170% to 2.8 billion tonnes, a figure that was 
surpassed in the first four months of 2009.2
What emissions trading cannot do:
•  Automatically compensate for political failures to set the right cap 
at national or EU level
• Decarbonise the whole economy alone
• Commercialise new technologies on its own
•  Deliver cost effective low carbon investment in the face of uncertain 
and overlapping regulations and policies.
EU ETS cannot: automatically compensate for political failures to set 
the right cap at national or EU level
A ‘cap and trade’ scheme is only as good as its cap. If the cap is set 
too high then the supply of allowances will be high relative to demand 
and the price will fall. Much recent criticism of EU ETS has focused on 
the fall in allowance price that occurred in during phase 1, and again 
in 2008 during the current phase. Price movements, however, simply 
reflect the supply-demand balance at a particular point in time. The 
real issue is whether a fall in price is symptomatic of the cap (and more 
specifically, the year-by-year trajectory of the cap) being at the ‘wrong’ 
level.
In phase 1 (2005-07) it is clear in retrospect that the cap was set too 
high. There were three reasons for this. The first was that given phase 
1 was explicitly designed as a short ‘learning phase’ to get the EU ETS 
up and running, the cap was determined on the basis of ‘business 
as usual’ trends for many sectors. As the cap was only designed to 
be a modest constraint, variation in economic growth can cause a 
modest constraint to become not constraining at all (more allowances 
than emissions). Secondly, the EU ETS started with very little robust 
data and this contributed to some sectors receiving allocations that 
exceeded their forecast and actual emissions. Thirdly, each EU member 
state set its own level of carbon allowances for its economy, with the 
scheme cap being the aggregate of member state allocations. This 
led to significant potential for ‘gaming’ by member states, and again 
contributed to a higher than necessary cap. Learning from this, for 
phase 3 the cap has been decided at EU level on a top down basis – 
the CBI has supported this change.
In phase 2 (2008-12) the emissions cap was set in order to help the 
EU meet its Kyoto Protocol target and used an assumption that the 
27 EU member states will experience 2.5% average annual economic 
growth up to 2010.3 Member states remained responsible for proposing 
their own allocations, but the EU took a tougher line in ensuring these 
allocations were robust. The UK allocation was 8Mt less than the 
phase 1 allocation and was supported by the CBI. The Commission 
forced all other member states to revise down their initial proposed 
allocations. The result was an EU-wide cap which was a 5% cut in 

4Trading up The future of emissions trading
sectors to be subject to double regulation, with some installations 
subject to different climate policies. Climate policy overlap is a cost on 
business and can create distortions in sectors.
The commercial and public sectors also contain significant numbers 
of large organisations not covered by the EU ETS. Although their 
electricity emissions are covered ‘upstream’ by the EU ETS, the small 
impact on their costs from the EU ETS-driven electricity price impacts 
(because electricity is a small part of their cost-base), justifies their 
inclusion in a separate cap and trade scheme (for example the UK’s 
Carbon Reduction Commitment). But the CBI is concerned about policy 
overlap which creates the possibility that carbon is valued differently in 
different schemes, making it difficult to cost-effectively plan emission 
reductions when a company is targeted by multiple policies.
Surface transport
There would be high monitoring and transaction costs if the EU-ETS 
were to apply to road transport. Road transport is already subject to 
a number of measures designed to encourage lower use or the use of 
lower CO2 emitting vehicles and fuels.
Shipping and aviation
The CBI and the UK Chamber of Shipping  support the development 
of an emissions trading system for shipping that ideally covers the 
entire shipping industry. We support the Committee on Climate Change 
conclusion that ‘Shipping is a clear example of a sector where unilateral, 
national or even regional action is problematic, and where achieving a 
global sectoral deal is therefore a priority’. It is appropriate that aviation 
will be part of the EU ETS starting in 2012 as a precursor to a global scheme.
EU ETS cannot: commercialise new technologies on its own
Emissions trading must be part of a broad policy framework that 
includes greater investment in low-carbon innovation. Emissions 
trading is a ‘pull’ policy mostly focused on existing technologies, with 
policies like the Renewables Obligation and extra incentives for carbon 
capture and storage creating a ‘push’ to new technologies to accelerate 
their development so that they can be supported by the carbon price 
alone. European production of the components of energy-saving and 
energy-generating products also needs encouragement.
EU ETS cannot: automatically deliver cost-effective low-carbon 
investment in the face of uncertain and overlapping regulations 
and policies
The price signal created by emissions trading allows companies to find 
the lowest-cost way to reduce emissions. But the potential wholesale 
electricity price implications of meeting the renewable energy target 
and uncertainty about international climate action are two issues 
emissions compared to phase 1. For 27 economies in the early stages of 
transitioning to a low-carbon economy, and against the backdrop of a 
growing Eurozone, this was probably an acceptable level of ambition.
The depth of the current recession has not meant that integrity and 
purpose of the carbon market has been compromised. In autumn 2008 
cash-stricken industrial companies sold a portion of the allowances 
they were holding to provide emergency cashflow. This caused the EU 
ETS carbon price to fall to around €10-15. This provided capital at a 
critical time when firms were struggling to maintain employment and 
production. Companies face ever-tightening reduction requirements 
and so had to balance selling some allowances for short-term benefit 
with the strong likelihood that future carbon prices will be higher. 
Discussion as to whether or not the emissions caps are overly lax 
ignores the fact that the EU is on track to meeting its carbon reduction 
goals. The real question is whether the severity of the recession 
justifies cutting the EU ETS cap to take account of lower than expected 
industrial output. The CBI position is that the level of the phase 2 
cap should not be reopened as it would be too legally and politically 
complex to make feasible. But the status of the economy and industrial 
output is part of the context within which the EU may revise the phase 3 
cap in light of the Copenhagen international climate negotiations.
EU ETS cannot: decarbonise the whole economy alone
A broadly defined emissions trading policy will improve the economic 
efficiency of climate policy. The wider the EU ETS is defined, the more 
potential emission reductions can be made. This allows carbon costs 
to be made explicit throughout supply chains and will make the 
trade-offs clearer as it becomes more likely that business will invest in 
carbon cutting options which give the best environmental and financial 
returns. But while there should be a presumption towards a wide 
scope, each case must be judged pragmatically.
Small emitters
Emissions trading is best suited for large emitters either making 
emission reductions themselves or buying reductions from others. The 
largest 7% of EU ETS installations represent 60% of total emissions, 
while the smallest 14% of installations only account for 0.14% of 
emissions.4 The final agreement on phase 3 will allow member states 
to apply to exclude installations with emissions fewer than 25,000 
tonnes/year, provided equivalent measures (such as a carbon tax or 
bespoke carbon policies such as UK Climate Change Agreements or the 
Carbon Reduction Commitment) are in place.
While the 25,000 tonnes/year threshold is an improvement over the 
original Commission proposed small emitters threshold, the CBI is 
concerned about the overlap of climate policies which can cause some 

5Trading up The future of emissions trading
which may create uncertainty that deters companies from investing in 
cost-effective low-carbon technologies.
Driven by the EU renewable energy target, the UK could have 35-40GW 
of installed wind power capacity by 2030. This will cause the electricity 
market of the future to be composed of high fixed cost, low operating 
cost power generation such as nuclear, wind, marine power and to a 
certain extent power generation using carbon capture and storage. The 
CBI report Decision time5 noted that as the proportion of low marginal 
cost technologies in the electricity mix increases, periods of very low, or 
even negative wholesale electricity prices, are likely to start occurring. 
A comprehensive analysis of wind intermittency also found that with 
high levels of wind generation, that there will be an increased period 
of extremely high, very low or even negative wholesale electricity 
prices. While these price spikes are necessary to enable back-up power 
generators that only operate for a few hours each year to make a return, 
this would represent a far higher level of commercial operating risk. 
As low-carbon generation will operate for 20-40 years, the prospect 
of highly volatile prices increases the uncertainty for investors in new 
low-carbon generation.6
The second element of uncertainty affecting the prospects for 
low-carbon investment is what impact any international climate 
agreement reached at Copenhagen will have on the long-term future 
of the EU carbon market. Questions include whether, by how much 
and when the EU makes its emission reduction target more stringent, 
the availability and price of offset credit, and how the profitability of 
investment in European low-carbon infrastructure compares with the 
profitability of investments outside Europe. Combined with concerns 
about overlap with other climate and energy policies and the wholesale 
electricity market implications of significant amounts of high fixed cost 
and low operating cost generation, it is not guaranteed that the EU ETS 
will assist the delivery of the necessary low-carbon investment. This 
is why CBI continues to call for a business-government taskforce to 
determine whether any adjustments or additions to the current market 
framework are necessary.
RECOMMENDATION 1 Get the cap right
The phase 3 cap will be re-examined in the light of any international 
agreement reached at Copenhagen, and changes will largely be a 
consequence of any revised (ie more stringent) emissions target which 
the EU agrees to at Copenhagen. The CBI supports BUSINESSEUROPE’s 
publication of a checklist of elements that European business wants to 
see agreed as part of an international climate change agreement. The key 
factors in determining revisions to the overall target and the phase 3 cap 
should be:
•  The implications of climate change science for appropriate reductions 
•  The level of EU ambition most likely to increase carbon reduction 
ambition in the developing world 
•  The judgement over whether the fall in EU emissions caused by the 
recession enables a tighter EU ETS phase 3 cap to be achieved at 
acceptable cost
•  An assessment of how far the Copenhagen agreement will lead to 
meaningful carbon constraint for the equivalent of EU ETS sectors 
outside the EU.
RECOMMENDATION 2 Get the scope right
Policy overlap makes climate policy less efficient, so the CBI calls for 
a detailed review of climate policy overlap for specific sectors. As part 
of this, the EU ETS small emitters’ threshold should be re-examined on 
a cost-benefit basis and potentially changed as part of the amending 
of the phase 3 agreement after an international climate agreement is 
concluded. If a global agreement for emissions reduction specifically 
for aviation is agreed and integrated in an agreement at Copenhagen, 
this may have implications for the inclusion of aviation in the EU ETS.
Six recommendations for the future of EU 
emissions trading post-Copenhagen
• Get the cap right
•  Get the scope right by re-examining the small emitters threshold 
and incorporating global agreements on aviation and shipping 
emissions
•  Extend the EU ETS timeframe to match the 20-40 year operation 
of low-carbon generation
•  Ensure measures to protect ‘carbon leakage’ sectors are 
effective, but only available to those genuinely in need
•  Improve the Clean Development Mechanism and smoothly create 
new carbon financing mechanisms
•  Link with other emission trading markets once key criteria are met

6Trading up The future of emissions trading
RECOMMENDATION 3 Extend the EU ETS timeframe
Phase 3 of the EU ETS currently runs to 2020 with an indication to 2025 
that the cap will continue to decline. To reduce uncertainty it should 
be confirmed through legislation that the operation of the EU ETS will 
continue to at least 2040.
RECOMMENDATION 4 Ensure measures to protect ‘carbon 
leakage’ sectors are effective, but only available to those 
genuinely in need
Free allocation or satisfactory compensation for genuinely at-risk 
sectors must be provided until sectors’ international competitors are 
actually subject to comparable carbon restraint. To avoid damaging 
competitiveness, the CBI supports a transparent assessment of which 
sectors or sub-sectors are at risk of carbon leakage. Free allowances 
will be distributed to these sectors through independently scrutinised 
benchmarks where feasible. Free allocation will never reach 100% of 
emissions as the declining emissions cap and the use of benchmarks 
create a strong incentive to reduce emissions.
Competitiveness concerns will not vanish once an international 
agreement is signed and it is unclear whether and on what time-scales, 
an international agreement and/or sectoral approach will lead to 
genuine, comparable carbon restraint or comparable carbon cost price 
increases across major non-EU emitters. Thus, changes to the amount 
of free allocation deemed exposed to carbon leakage should depend 
on a ‘trigger mechanism’ of the proportion of a sector’s international 
competitors which subject to policies matching the following criteria:
•  Similar monitoring, reporting, verification, compliance and 
enforcement practices
•  Comparable levels of access to offset credits
•  Internalisation of the cost of carbon for non-EU installations. 
•  Existence of measures which result in an equivalent burden for 
sectors defined as energy-intensive and exposed to international 
competition.
Exhibit � Sectoral exposure to carbon leakage risk varies (%) 
Source: European Commission draft decision on carbon leakage
http://ec.europa.eu/enviroment/climat/emission/carbon_en.htm
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7Trading up The future of emissions trading
Free allocation does not address electricity price increases caused 
by the cost pass-through from auctioning carbon allowances in the 
electricity sector. The UK government should exercise the derogation 
in the EU ETS Directive that permits member states to partially 
compensate the most electricity-intensive sectors from electricity price 
increases.
Other carbon and renewable incentives policies may also result in 
significant energy price increases. For instance, the government 
estimates that the EU ETS only accounts for 25% of the energy price 
increases a medium-sized business will face by 2020. Other policies 
such as the Renewables Obligation and Renewable Heat Incentive 
contribute much more to the estimated 34% increase in energy 
prices by 2020.7 The CBI energy report Decision time recommended 
the government explore how sectors with the most significant 
competitiveness concerns be exempted from further energy price 
increases caused by other climate and renewable energy policies.
The Commission has completed its initial assessment of carbon 
leakage risk (Exhibit 1, page 6). The analysis suggests that exposure 
to carbon leakage risk varies widely from sector to sector. But this is a 
complex issue and industry concerns should be taken seriously about 
the need to use accurate up-to-date data, and that impact on gross 
value added is an imperfect measurement when companies make 
investment decisions based on profitability.
The CBI calls for more effort from governments, the Commission 
and business to improve the accuracy of measuring the impact of 
all climate policies on business competitiveness. This is particularly 
needed in the ceramics and foundry sectors, where the statistics 
which track industrial production may have missing, incomplete 
or insufficiently detailed data to robustly assess the risk of carbon 
leakage. With improved data and after an international climate 
agreement, a further co-decision process on the EU ETS should lead 
to a tightening of the criteria for determining risk of carbon leakage. In 
this way, free allocation or appropriate compensation can be focused 
on those that really need it.
RECOMMENDATION 5 Improve the Clean Development 
Mechanism and smoothly create new carbon financing 
mechanisms
The Clean Development Mechanism (CDM) is successful in stimulating 
many different projects around the world (4,734 CDM projects are 
currently in different development stages), is reducing emissions 
(1168 million tonnes of CO2 emissions reduced before the end of 
2012)9, has reduced the cost of compliance for EU businesses, has 
created new business in the UK and internationally, is creating ‘climate 
entrepreneurs’ and has created significant investment in low-carbon 
technologies10 which is helping to build international cooperative 
action and supportive policies in developing countries.
In Copenhagen, the capacity, speed and transparency of the processes 
for creating, approving and regulating CDM/JI projects must be 
improved. Estimates of the time from project idea to entering the 
rigorous CDM process range from six to 18 months and the average 
time to complete the CDM registration process is 660 days.11 These 
delays mean that there are far fewer CDM projects entering the EU- ETS 
than allowed. The potential of the project-based CDM should consider 
new sources of credits, such as carbon-capture and storage and 
low-carbon IT projects. The CDM should be expanded beyond a project-
by-project approach and consider multi-project baselines, positive 
lists of project and technology types, programmes of activities and new 
methodologies.
All countries should recognise the international UN approval process 
and avoid the regional determination of permissible credits. Joint 
Implementation (JI) has been slower to take-off than the CDM, so 
EU and international barriers must be overcome to accelerate effort. 
Expanded capacity building and support for project development is 
needed in the Least Developed Countries.
New mechanisms for financing carbon reductions are needed 
and should be a part of the Copenhagen climate agreement. The 
creation of a ‘sectoral mechanism’ would be welcome but investor 
certainty should be safeguarded by continuing the CDM and JI as new 
mechanisms are created. Sectoral mechanisms should directly credit 
the point of emission reduction investment in the sector. Investors 
will not take risks if the creation of carbon credits depends on the 
aggregate success of activities of other installations in the sector 
in reducing emissions. Any new mechanisms should have a long 
time horizon out to 2050 with a predictable implementation with 
transparent rules and efficient, professional governance.
RECOMMENDATION 6 Linking with other emission trading 
markets once key criteria are met
Notification of linking emissions trading markets must be done with 
sufficient notice to the market. The following criteria12 should be used 
to transparently compare examples of different types of installations in 
order to assess the suitability of linking: 
•  Compatibility of measurement, reporting and verification: does a 
tonne equal a tonne?
•  Level of transparency, reporting and dissemination of annual 
emissions data

8Trading up The future of emissions trading
•  Ability to predict supply and demand in the scheme and forecast 
future scarcity
•  Transparent reporting including installation allocation, national 
emissions reporting
•  Information on scheme scope including source types, entry 
thresholds, closure, transfer and new entrant rules
•  Emissions baseline and projections, reduction targets, limits on use 
of project credits
•  Understand the different allocation methodology types and how the 
proportion of free vs. auctioned allocation in differing schemes will 
evolve. If the proportions differed radically, and if they were to remain 
unchanged, this will solidify the impact on competitiveness via 
increased costs for installations with a higher proportion of non-free 
allocation
• Using common infrastructure like the International Transaction Log.
It would be difficult to link to other carbon markets that either have a 
voluntary approach or that have some sort of price cap or floor. 
A process should be instigated to move towards a single global carbon 
reporting standard in order to create the transparency required to 
ensure the comparability of actions.
Footnotes
1  Point Carbon, 2009. ‘Carbon 2009’. www.pointcarbon.com/research/
carbonmarketresearch/analyst/1.1083366 
2  E&Y, 2009. Prospectus for London the Low-Carbon Capital, p12: www.london.
gov.uk/news/docs/London-low-carbon-report-09.pdf, and European Climate 
Exchange, www.ecx.eu/ 
3  European Commission, 2005. ‘Further guidance on allocation plans for the 
2008 to 2012 trading period of the EU Emission Trading Scheme’, http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2005:0703:FIN:en:pdf
4  European Commission, 2008. ‘Commission Staff Working Document – 
accompanying document to the proposal for a directive of the European 
Parliament and of the Council amendment Directive 2003/87/EC so 
as to improve and extend the EU greenhouse gas emission allowance 
trading system’. http://ec.europa.eu/environment/climat/emission/pdf/
com_2008_16_ia_en.pdf p.24 
5  ‘Decision time: driving the UK towards a sustainable energy future’, CBI. 2009. 
http://climatechange.cbi.org.uk/reports/00283/ 
6  Pöyry, 2009. ‘Impact of variability, how wind energy could change the UK and 
Irish energy markets’, www.poyry.com/linked/group/study
7  Department of Energy and Climate Change, 2009. Analytical Annex of the 
Low-Carbon Transition Plan http://www.decc.gov.uk/en/content/cms/
publications/lc_trans_plan/lc_trans_plan.aspx
8  This graph does not include data for 76 sectors where one of the data points 
was confidential and not publicly released. It does also not include the sectors 
with the highest cost impact compared to gross value add (GVA) – cement 
(59.2%) and lime production (85.9%). 
9  UNEP RISOE, November 2009. CDM/JI Pipeline Analysis and Database, http://
cdmpipeline.org/overview.htm 
10  CDM provided triple the official development aid investment in renewable 
and energy efficiency projects in 2006, and could create 25-50% of the 
US$200bn of annual investment needed in 2030 to reduce global emissions 
to current levels (UNFCCC, 2007. ‘Investment and financial flows to address 
climate change’, http://unfccc.int/files/cooperation_and_support/financial_
mechanism/application/pdf/background_paper.pdf – pages 141 and 161).
11  Norton Rose, February 2009. ‘Global climate change – a report on the carbon 
market’, http://www.nortonrose.com/knowledge/publications/2009/
pub19791.aspx
12  Based on UK Emissions Trading Group, 2007. ‘Linking with emissions trading 
schemes of third countries’, www.uketg.com
Product code: BUS_036