The second phase of the European Emissions Trading Scheme (ETS) kicked off this week with experts confident that the problems that dogged the first phase of the cap-and-trade scheme from 2005 to 2007 have been largely resolved.

The EU has set more demanding caps for the phase II of the scheme which will require firms involved to deliver a reduction on 2005 emissions levels or buy in extra EUAs to cover their carbon output.

Matthew Farrow, head of environment at the CBI, agreed that the early indications were positive. "Phase II appears to be working better," he said. " Allowances are set below 2005 emission levels so there should be a real cut in emissions."

The price of EUAs climbed this week to over €23.50 and experts agreed that the tighter emission caps meant the price of carbon was set to rise throughout phase II.

Henrik Hasselknippe, director of emissions trading analysis at research firm Point Carbon, said that this week's price climb was largely driven by concerns that rising oil prices will lead to a change towards more carbon intensive coal. Such a shift would lead to increased emissions and drive up demand amongst energy firms for EUAs, he explained.

However, he added that there was also an "underlying bullishness" in the carbon market about the prospects for phase II of the ETS and an acceptance that carbon allowances for phase III of the scheme, beginning in 2013, would be tighter still.

Opinions were divided however on the prospect for polluters to secure windfall profits from phase II of the scheme.

Speaking to The Independent this week, Centrica managing director Jake Ulrich said that the fact that the bulk of the EUAs were distributed to polluters for free meant there was little incentive to cut emissions. "If companies and individuals are to be made to reduce their output of CO2, the ETS needs to be structured to make polluters pay," he said.

Tariq Akbar, senior energy analyst for research firm Datamonitor argued that the tighter emission caps issued for phase II meant it was unlikely that firms would be able to secure windfall profits through the scheme, regardless of whether EUAs were freely allocated or auctioned, he said.