Three years into Europe's Emissions Trading System second trading period - how is it performing? This report provides a comprehensive assessment of the environmental outlook of the ETS, covering permit allocations, oversupply, companies use of offsets and projected effectiveness of the cap through to 2020.

It finds that the huge overallocation to industry in Phase 2 has left a double legacy undermining the effectiveness of the scheme to 2020 and beyond: a carryover of permits banked into Phase 3 and an inflated baseline which affects the starting position of the declining carbon cap beginning in 2013. The result: a likely oversupply that grows to an eye-watering 1.9 billion tonnes through to 2020, equivalent of a year's worth of carbon permits in the scheme.

Sandbag recommends a number of measure to save the ETS from redundancy: that the European Commission propose set-aside of 1.7 billion permits before 2013, as well as opening up the Directive by 2015 to adjust the cap.

This report critically evaluates the perfomance and prospects of the EU ETS as it currently stands. It explores how Phase 2 caps have been weakend by recession, and how slack from Phase 2 - in the form of unused offset credits - is likely to defer abatement within the EU for much of Phase 3. In addition we explore how large, undeserved surpluses have accrued to specific sectors and companies within the EU ETS.

Our companies analysis can also be viewed as the Carbon Fatcats 2009 pullout displayed below.

The report includes a note of correction from October 2010.

The EU Emissions Trading System (ETS) is a central plank of the EU's policy framework towards tackling climate change. Covering 50% of Europe's emissions it creates approximately 2 billion tradeable permits a year. The scheme has the capacity to be a very powerful tool in cutting carbon emissions in the EU but it is currently a blunt tool, not delivering to its full potential. This report identifies two major flaws with the Emissions Trading Scheme as it stands and discusses the impact of these in relation to EU ambition on tackling climate change.