The European Emissions Trading Scheme (ETS) is an absolute, shameful and thoroughly predictable disgrace.
It starts from sound enough principles. A market with a shortage - in this case, of CO2 permits - will (a) see prices rising and (b) liberate the boundless ingenuity of (capitalist) mankind to fix the shortage at the least possible cost. If, as I do, you accept that reducing CO2 emissions is a legitimate (if debatable) objective of policy, this might be a way to go about it.
Then it starts to go wrong, along three axes.
(1) Of relatively minor importance but symptomatic of the ignorance of continental European politicians who truly do not understand how markets work, the initial allocation of permits was free. Somehow these dunderheads believed that (a) a meaningful price of CO2 permits would nonetheless emerge, but at the same time (b) electricity generators (by far the largest class of participants) wouldn't add the opportunity-cost of a permit (= its market price at a given point in time) onto the price of their electricity "because they were given free permits". Well, duh - they can sell the permits if they don't use them !! The Brits told them this would happen: the Germans asserted it would not: the Brits were right: the Germans mounted a parliamentary enquiry to figure out how this happened ...
(2) The interface of the ETS with the rest of the world was completely botched. Instead of ring-fencing participating countries and imposing a carbon tax on imported goods (to prevent an exodus of manufacturing to places that don't penalise emissions, and have less efficient kit so they actually emit more per unit of manufacture), they allowed a system of Kyoto-mandated credits for "emissions-reducing projects" in many non-EU countries to be tradable in the ETS. The entirely predictable results (I told them ...) were (a) the shifting of manufacturing to China et al, and (b) a slew of bogus projects, bent projects and non-projects to make Italian olive-farming CAP subsidy claims look like letters to the tooth-fairy.
(3) The paperwork was ripe for fraud. Firstly, the VAT carousel scam works a treat on valuable bits of paper. Secondly, literally anyone is allowed to trade in the ETS. Thirdly, all EU countries run a Registry of ETS certificates. Now some countries are quite competent at this sort of thing but, mentioning no names, some are not. The scams are legion, and run to many billions of €.
Add to this the extraordinary facility with which incontinent EC officials periodically let market-sensitive data slip, along with false information and rumours, and, well to cut a long story short the market has been suspended (& the mini-market in the USA has died).
May we hope it will now be scrapped ? Unlikely: there are some huge interests now at stake, and all the major energy players, plus many banks, have huge CO2 books.
But - what the hell is Crapper Huhne doing, making the ETS a foundation-stone of his new Electricity Market "Reforms" ? In December, by which time all of the above was known, he rolled out his madcap 4-pronged scheme for tampering with the UK electricity market: building on the CO2 price that slithers forth from the ETS is one of them.
It would be funny if it didn't represent a mighty piece of grit in a system - the energy market - that we need to run as smoothly and efficiently as possible. In short, it is a tax upon us all, with large and unintended transfers to crooks at home and abroad, but no social gain whatsoever.