Governance of CO2 markets: Lessons from the EU ETS

The European emissions trading scheme (EU ETS) is the centerpiece of Europe׳s climate policy. The system has been undermined variously by the weakness of its regulation, an undesirable overlap with other public policies and the far-reaching economic and financial crisis that caused the market price of allowances to plunge. This article attempts to identify the conditions for making the coming years of the EU ETS a success. It draws historical lessons from the eight years the scheme has been in operation, and then presents the various interventions by the public authorities currently under discussion in order to revive the market. Finally, the article proposes to draw lessons from monetary policy by outlining what might be the mandate of an Independent Carbon Market Authority, with responsibility for the dynamic management of the supply of allowances, and whose main mission would be to ensure the optimal linkage between the different temporal horizons of the climate strategy. This article could provide important lessons for schemes developing in the rest of the world, especially in South Korea or in China. •History suggest that ex ante expectations tend to overestimate the constraint.•Economic conditions, policy overlaps, and Kyoto credits cause the current weakness.•“Set aside” or “backloading” does not resolve structural issues.•Changing/extending the reduction target is necessary but not sufficient.•An independent authority could ensure the credibility of the constraint over time.