Losing the lead? Europe’s flagging carbon market

The report argues that the EU ETS is failing due to a massive oversupply of allowances caused by the 2008 economic recession and industrial overallocation. Sandbag identifies a total excess of 3.1 billion tonnes (Gt) of allowances, including 2.2Gt from obsolete demand forecasts and 0.9Gt from industrial overallocation. The document highlights that 78% of the net surplus is concentrated among ten steel and cement companies, which have generated significant revenues from selling surplus permits. To remedy this, the report recommends the permanent cancellation of 3.1Gt of allowances from Phase 3 auctions, the establishment of a more ambitious Phase 4 carbon budget aligned with 2050 goals, and the introduction of mechanisms like a "heat exchanger" and a strategic demand-correction reserve to protect the system from future exogenous shocks.

• The EU ETS is suffering from a severe oversupply of allowances because the emissions projections used to set the Phase 3 caps in 2008 are now obsolete, with demand being 2.2 billion tonnes (Gt) lower than anticipated.
• Beyond the impact of the recession, the original caps were too generous to industry, resulting in an additional 900 million tonnes (Mt) of overallocation in Phase 2, which further inflated the Phase 3 baseline by 323Mt.
• A small group of ten steel and cement companies holds a disproportionate share of the market surplus, accounting for 78% of the net surplus in the EU ETS (approximately 304Mt).
• The use of offsets has further depressed the carbon price and undermined domestic abatement, with 1.7Gt of offsets expected to be surrendered by 2020, vastly outweighing the expected 613Mt of cumulative EUA shortfalls.
• Sandbag recommends the permanent withdrawal of 3.1Gt of allowances from Phase 3 auctions, distributed in annual increments of 387.5Mt, to restore the original scarcity and drive domestic investment.
• To align with the 2050 Low-Carbon Roadmap, the linear reduction factor for the Phase 4 cap should be increased to approximately 2.52% (54.1Mt per year), compared to the current 1.74% (37.4Mt).
• The report proposes a "heat exchanger" mechanism to prevent the carry-over of "hot air" allowances between trading phases by cancelling allowances equivalent to the net surpluses of the previous period.
• A strategic demand-correction reserve is proposed to withhold a percentage of allowances annually, which would be permanently cancelled if exogenous demand-side reductions occur.
• To ensure offset supplementarity, the report suggests introducing a price trigger for offset availability or a top-up tax on offset purchases to establish a price floor.

APA

Morris, D., Crow, L., Elsworth, R., Kim, S., & Watson, L. (2012). Losing the lead? Europe’s flagging carbon market. Ember. https://ember-energy.org/app/uploads/2020/03/2012-environmental-outlook-for-the-EU-ETS.pdf

Chicago

Morris, Damien, Louise Crow, Rob Elsworth, Sang Kim, and Laurence Watson. Losing the lead? Europe’s flagging carbon market. Ember, 2012. https://ember-energy.org/app/uploads/2020/03/2012-environmental-outlook-for-the-EU-ETS.pdf.

Wikipedia

{{cite report |last1=Morris |first1=Damien |last2=Crow |first2=Louise |last3=Elsworth |first3=Rob |last4=Kim |first4=Sang |last5=Watson |first5=Laurence |title=Losing the lead? Europe’s flagging carbon market |publisher=Ember |date=19 June 2012 |url=https://ember-energy.org/app/uploads/2020/03/2012-environmental-outlook-for-the-EU-ETS.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{morris2012losing, author = {Morris, Damien and Crow, Louise and Elsworth, Rob and Kim, Sang and Watson, Laurence}, title = {{Losing the lead? Europe’s flagging carbon market}}, institution = {Ember}, year = {2012}, month = jun, url = {https://ember-energy.org/app/uploads/2020/03/2012-environmental-outlook-for-the-EU-ETS.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }