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The report finds that the EU ETS is significantly oversupplied, with industrial sectors accumulating large surpluses of permits while the power sector faces a shortfall. This imbalance, exacerbated by the 2008 recession, threatens to weaken the Phase 3 cap by approximately 1.9Gt. The author highlights abuses in international offsetting, where surplus-holding installations use offsets for profit (arbitrage) or to subsidize foreign competitors. To rectify this, the report recommends a 1.7Gt set-aside of Phase 3 permits, a steeper annual cap reduction of 2.4% by 2016, and increased transparency in reporting installation ownership and waste gas transfers.

The document assesses how different BCA designs—specifically direct versus life-cycle emissions and varying carbon prices—would affect Chinese exports. It finds that while certain sectors like iron and steel are highly exposed, the overall economic impact on China's total exports would be limited, potentially reducing the incentive for exporters to lower emissions rather than divert trade.

The report assesses the EU's Climate and Energy Package, concluding that the 20% emissions reduction target by 2020 is insufficient to reach the 2050 goal of 80% reduction without incurring extreme economic costs in later decades. It recommends increasing the 2020 target to 30%, establishing a stringent 2030 EU ETS cap of 45-50% reduction, and shifting energy efficiency focus toward absolute energy savings in buildings and transport. The authors argue that these measures would reduce oil and gas dependency, foster the Low Carbon and Environmental Goods and Services (LCEGS) market, and prevent high-carbon infrastructure lock-in.

The paper uses the CASE II model to analyze how different EU ETS allocation modes and emissions targets (-21% to -34%) affect carbon leakage and production in the cement, aluminium, steel, and electricity sectors. It finds that while output-based allocation (OBA) and border adjustments (BA) can mitigate leakage, they create different trade-offs regarding production levels and electricity prices. The author concludes that carbon leakage must be readdressed if the EU raises its ambition, as the impacts vary significantly by sector and allocation method.

The report identifies the 'Carbon Fat Cats'—ten companies, primarily in the steel and cement sectors, that amassed a combined surplus of 240 million emissions allowances between 2008 and 2010, valued at approximately €4.1bn. This over-allocation is attributed to inflated growth projections and the economic recession, allowing these firms to profit through windfall sales or banking permits for future use. In contrast, the power sector faces a significant deficit, effectively subsidising industrial surpluses. The report also highlights the use of cheap international offsets, some from direct rivals in China and India, which undermines industry claims regarding competitiveness and carbon leakage. Sandbag recommends increasing the EU emissions reduction target to 30%, implementing an allowance 'set-aside' for Phase III, restricting the use of offsets from rival industries, and improving data transparency regarding company ownership and waste gas transfers.

NGOs express concern over a European Commission draft proposal that would treat all information in the EU ETS Union Registry, including account holdings and serial numbers, as confidential. The briefing argues that removing serial numbers would eliminate the traceability necessary to enforce the ban on industrial gas (HFC and N2O) carbon credits and verify the eligibility of Kyoto units based on issuance dates. The authors urge EU Member States to maintain open access to installation and account data to ensure market accountability and the effective implementation of the scheme.

The report estimates that the currently proposed EU ETS Phase III structure would raise between €150-190bn under a 20% emissions reduction target, increasing to €200-310bn if the target is raised to 30%. Germany is projected to receive the highest proportion of these revenues. The authors argue that these funds should be prioritised for climate-related expenditures, such as carbon capture and storage (CCS) demonstrations, low-carbon RD&D, and energy efficiency improvements for vulnerable groups. The report also explores an alternative scenario where the cement and steel sectors are fully auctioned with border levelling; this would increase revenues by €18-22bn from cement and €14-17bn from steel under a 20% target. While some suggest using these funds for national debt reduction, the authors warn that this could damage the legitimacy of the EU ETS, though they acknowledge it as a potential short-term transitional option for severely indebted Member States.

The document estimates that Phase III of the EU ETS will generate between €150-190bn in revenues across the EU by 2020, potentially rising to €200-310bn if a 30% reduction target is adopted. Germany is projected to receive the highest proportion of these revenues, while Italy, Poland, Spain, and the UK are each expected to accrue over €10bn from the power sector alone. The briefing also explores the financial impact of expanding auctioning to the cement and steel sectors and suggests strategic uses for these funds, including carbon capture and storage (CCS) demonstration, renewable energy RD&D, grid infrastructure, and international climate finance.

The report analyzes how the EU can move to a 30% greenhouse gas reduction target by 2020. It finds that full implementation of existing renewable energy and energy efficiency targets could lead to a domestic reduction of approximately 30%, though current policy instruments for energy efficiency are insufficient. The report also examines the role of offsets and LULUCF accounting, noting that these could reduce the required domestic effort to approximately 20% while still nominally meeting a 30% target. It concludes that the EU ETS cap would need significant adjustment—potentially to 29-43% below 2005 levels—to remain consistent with these targets.

The Swedish pulp and paper industry has shifted its strategy toward increased on-site electricity production, wind power investments, and new production partnerships. This change was primarily driven by economic factors, specifically the 1996 Swedish energy market reform and the EU ETS, while renewable electricity certificates provided additional income. Cognitive shifts regarding electricity market pricing and the EU ETS also contributed to this strategic reorientation.

The document concludes that a federal US carbon market is unrealistic for the foreseeable future, but identifies potential for linking the EU ETS with regional systems like the Western Climate Initiative (WCI) and California. It highlights that while the Regional Greenhouse Gas Initiative (RGGI) is operational, its low prices make it an unattractive linking partner. The authors argue that a bottom-up climate architecture, rather than a single global carbon market, is the most likely trajectory for international climate cooperation.

CDM Watch and partner organizations are calling on EU Environment Ministers to ensure that HFC-23 and adipic acid (N2O AA) offset credits are banned from national registries for non-traded sectors by April 2013. While these credits are banned from the EU Emissions Trading System (EU ETS) as of 30 April 2013, the authors argue that the Effort Sharing Decision (ESD) could be exploited to allow their use toward national targets, undermining domestic emissions reductions and the Montreal Protocol.

The document examines the strategic importance of low-carbon technology for the EU, highlighting the risk of 'high carbon lock-in' if infrastructure decisions today commit economies to high-emissions pathways for 20-30 years. It argues that the current 20% emissions target is insufficient to drive the necessary scale and speed of innovation. The authors propose a 30% target by 2020 to provide certainty for investors and spur the deployment of technologies like electric vehicles and carbon capture and sequestration (CCS). The report also emphasizes the need for a system-wide risk management approach and increased international cooperation, particularly with China, the US, and Japan, to create integrated global markets and avoid protectionism.

The research examines how increasing the EU's 2020 emission reduction target beyond 20% interacts with energy security in Poland, the Czech Republic, and Latvia. It distinguishes between 'objective' energy security (quantifiable parameters) and 'subjective' energy security (political discourse), finding that these often diverge. The authors argue that more stringent targets could improve energy security by reducing import dependency through renewables and energy efficiency, and by providing a clearer policy framework to avoid 'suboptimal investment' and 'stranded assets' in technologies like nuclear and carbon capture and storage (CCS). While Poland and the Czech Republic express high subjective insecurity despite relatively stable objective positions, Latvia remains objectively vulnerable due to its high reliance on Russian imports, though it possesses significant renewable potential.

The report argues that the EU's current Climate and Energy Package is insufficient to reach its 2050 goal of 80-95% emissions reduction at a reasonable cost. It suggests that moving to a 30% reduction target by 2020, combined with proactive investment policies in the building and transport sectors and a more predictable carbon price signal via the ETS, would reduce long-term costs and prevent the EU from losing market share in low-carbon technologies to competitors like China and South Korea.

CDM Watch argues that HFC-23 and N2O abatement projects under the Clean Development Mechanism (CDM) create perverse incentives and fail to represent real emission reductions. The organization calls on EU Member States to support a European Commission draft Regulation that bans the use of these credits in the EU ETS from 1 January 2013 and prohibits their banking into Phase 3 to maintain environmental integrity over private investor interests.

The executive summary evaluates the EU ETS's role in driving low-carbon investment, finding that while it provides a useful framework, its impact is hindered by the Clean Development Mechanism, inadequate financial reporting standards, and short investment horizons for energy efficiency.

The study analyzes how EU ETS carbon pricing and allowance allocations influence the strategic decisions of manufacturing firms. Key findings indicate that while many firms implement basic energy-saving measures, a significant portion of EU ETS participants engage passively with the market. Crucially, the research identifies a causal link between the stringency of emissions caps and 'clean' product innovation, suggesting that generous free allowance allocations may actually hinder innovation by reducing the signaling effect for senior management.

The paper examines the accounting deficiencies in the EU Emissions Trading Scheme (EU ETS) under IFRS, specifically the lack of authoritative guidance following the withdrawal of IFRIC 3. It critiques the common 'net liability approach' where free allocations are recognized at nil, arguing that this hides the economic value of assets and windfall profits. The authors propose a framework where allowances are initially recognized at fair value, balanced by a government grant as deferred income, and subsequently measured based on whether they are held for compliance or trading. This approach aims to treat CO2 emissions as a cost of production and increase transparency for investors regarding a firm's low-carbon transformation.

The study finds that climate policy elements, including the EU ETS and long-term targets, are generally rated as less relevant to corporate investment decisions in the power sector than market factors and technology-specific regulations like feed-in tariffs. For technology providers, long-term targets are significantly more relevant than the EU ETS for both RD&D and sales. Power generators show a high correlation between the perceived relevance of the EU ETS and long-term targets. The research also indicates that technology providers' reliance on technology-specific policies is strongly linked to their product portfolios, while power generators' relevance ratings are less dependent on their technology portfolios. Higher long-term CO2 price expectations and greater certainty about those prices correlate with a higher perceived relevance of the EU ETS for new plant investments.