In the more than two decades since the Kyoto Protocol was adopted, national policies on climate change have had dangerously and disappointingly little effect on global emissions.
Within the current economic system, perhaps the most ambitious attempt to reduce emissions has been the EU’s emissions trading system (or ETS). In operation since 2005, the ETS covers more than 11,000 heavy-energy-using power stations, factories and airlines, representing around 40% of the EU’s greenhouse gas emissions. The scheme operates via a cap-and-trade principle where an EU-wide cap on emissions means that firms must buy allowances, essentially paying for their polluting activities.
Yet although the ETS has had some success in reducing emissions, finance professor Panayiotis Andreou and I recently showed that the scheme is under-penalising those who pollute the most – primarily because the price of allowances has typically been too low.