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COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV

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  • Kenneth Bruninx

    (KU Leuven
    EnergyVille)

  • Marten Ovaere

    (Ghent University
    Yale University)

Abstract

The EU emissions trading system’s (ETS) invalidation rule implies that shocks and overlapping policies can change cumulative carbon emissions. This paper explains these mechanisms and simulates the effect of COVID-19, the European Green Deal, and the recovery stimulus package on cumulative EU ETS emissions and allowance prices. Our results indicate that the negative demand shock of the pandemic should have a limited effect on allowance prices and rather translates into lower cumulative carbon emissions. Aligning EU ETS with the 2030 reduction target of −55% might increase allowance prices to 45–94 €/ton CO2 today and reduce cumulative carbon emissions to 14.2–18.3 GtCO2 compared to 23.5–33.1 GtCO2 under a −40% 2030 reduction target. Our results crucially depend on when the waterbed will be sealed again, which is an endogenous market outcome, driven by the EU ETS design, shocks and overlapping climate policies such as the recovery plan.

Suggested Citation

  • Kenneth Bruninx & Marten Ovaere, 2022. "COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV," Nature Communications, Nature, vol. 13(1), pages 1-10, December.
    • Handle: RePEc:nat:natcom:v:13:y:2022:i:1:d:10.1038_s41467-022-28398-2
    DOI: 10.1038/s41467-022-28398-2
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    4. Ovaere, Marten & Proost, Stef, 2022. "Cost-effective reduction of fossil energy use in the European transport sector: An assessment of the Fit for 55 Package," Energy Policy, Elsevier, vol. 168(C).

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