Changes in the climate and its adverse implications for the welfare of humans and economies have sparked debates and advocacies for the reduction in the emission of greenhouse gases. In Europe, a market for the training of greenhouse gas was established and remains the largest environmental market involving thousands of operators with obligations to minimize the emission of carbon dioxide from the planet earth. This paper reviews the European Union Emission Trade Scheme from a competitive market perspective, discusses the benefits of free allocation and auctioning and their economic implications. Although the use of free allowances was employed to address the exposure of EU-regulated firms/plants to international competition, it promotes the continual use of inefficient plants, as a plant closure would, in most schemes, mean the loss of the (over) compensation that these free allowances constitute. Auctioning offers the best option for enhancing transparency and competitiveness in the EU carbon market as it promotes optimal allocation of carbon emissions.
