IDEAS home Printed from https://ideas.repec.org/a/ces/ifofor/v22y2021i03p41-46.html
   My bibliography  Save this article

Discretionary Intervention Destabilizes the EU Emissions Trading System: Evidence and Recommendations for a Rule-Based Cap Adjustment

Author

Listed:
  • Michael Pahle
  • Ottmar Edenhofer

Abstract

The EU is currently preparing a major overhaul of its climate policy framework to deliver on the Green Deal’s new climate targets of a 55 percent cut in greenhouse gas (GHG) emissions relative to 1990 by 2030 and GHG neutrality by 2050. Extending and strengthening the role of carbon pricing, implemented through the EU Emissions Trading System (EU-ETS), will play an important role in this framework. Accordingly, the design and governance of the EU-ETS will be ever more crucial. In this article, we focus both on the 2018 EU-ETS reform as the first step on a slippery slope of increasing discretionary intervention and on the upcoming reform risks reinforcing this trend. In their seminal work, Kydland and Prescott (1977) caution against such interventions, because of their ability to destabilize the market and engender recurring interventions. This limits the capacity of policymakers to credibly commit to long-term targets, which undermines the dynamic efficiency of intertemporal emissions trading systems like the EU-ETS. To counteract this trend, we provide recommendations for rule-based adjustments to the EU-ETS.

Suggested Citation

  • Michael Pahle & Ottmar Edenhofer, 2021. "Discretionary Intervention Destabilizes the EU Emissions Trading System: Evidence and Recommendations for a Rule-Based Cap Adjustment," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(03), pages 41-46, May.
    • Handle: RePEc:ces:ifofor:v:22:y:2021:i:03:p:41-46
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/CESifo-forum-2021-3-edenhofer-pahle-Discretionary-Intervention-Destabilizesthe-EU-Emissions-Trading-System.pdf
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ifofor:v:22:y:2021:i:03:p:41-46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/ifooode.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.