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After monetary policy, climate policy: is delegation the key to EU ETS reform?

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  • G. Grosjean
  • W. Acworth
  • C. Flachsland
  • R. Marschinski

Abstract

Since the crash of carbon prices in phase II of the European Union Emissions Trading System (EU ETS), many have argued that the low price mirrors structural failures requiring intervention. A wide range of reform options have been suggested, including delegating the governance of the carbon market to an independent authority. This article analyses the debate by reconstructing the various arguments for or against reform. Three possible drivers of the price decline are investigated: (1) exogenous shocks; (2) insufficient credibility; and (3) market imperfections. It is argued that the extent to which a low price is problematic and warrants reform depends on the specific objectives associated with the EU ETS and the perception on the functioning of the market. A two-dimensional EU ETS Reform Space, comprising the degree of price certainty within the EU ETS and the level of delegation, is devised. Within the Reform Space, EU ETS reform options currently discussed are mapped. This descriptive structure offers a framework to clarify whether delegation responds to various concerns with respect to the EU ETS. Delegation might enhance flexibility under unforeseen circumstances, decrease policy uncertainty, and increase the credibility of long-term policy commitments. However, higher degrees of delegation face challenges including democratic legitimacy and political feasibility. Policy relevance In January 2014, the European Commission proposed a structural reform of the EU ETS characterized by a quantity triggered Market Stability Reserve, increasing flexibility in allowance supply. However, intense debate has revealed considerable differences in opinion regarding the need for and objectives of any adjustment mechanism. Other proposals, including various degrees of delegation to a rule-based adjustment mechanism or an independent authority as well as degrees of price certainty, were also suggested. This article offers a new framework, the EU ETS Reform Space, to compare reform options more systematically. This work therefore contributes to structuring the policy debate by providing a tool to better understand the merits and demerits of various reform proposals

Suggested Citation

  • G. Grosjean & W. Acworth & C. Flachsland & R. Marschinski, 2016. "After monetary policy, climate policy: is delegation the key to EU ETS reform?," Climate Policy, Taylor & Francis Journals, vol. 16(1), pages 1-25, January.
    • Handle: RePEc:taf:tcpoxx:v:16:y:2016:i:1:p:1-25
    DOI: 10.1080/14693062.2014.965657
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    1. Garnaut,Ross, 2011. "The Garnaut Review 2011," Cambridge Books, Cambridge University Press, number 9781107691681.
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    1. Baer, Moritz & Campiglio, Emanuele & Deyris, Jérôme, 2021. "It takes two to dance: Institutional dynamics and climate-related financial policies," Ecological Economics, Elsevier, vol. 190(C).
    2. Perino, Grischa & Willner, Maximilian, 2017. "Remove or reserve? Allowance prices and design choices in Phase IV of the EU Emission Trading System," WiSo-HH Working Paper Series 36, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    3. David Klenert & Franziska Funke & Linus Mattauch & Brian O’Callaghan, 2020. "Five Lessons from COVID-19 for Advancing Climate Change Mitigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(4), pages 751-778, August.
    4. Koch, Nicolas & Grosjean, Godefroy & Fuss, Sabine & Edenhofer, Ottmar, 2016. "Politics matters: Regulatory events as catalysts for price formation under cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 78(C), pages 121-139.
    5. Xu, Jia & Tan, Xiujie & He, Gang & Liu, Yu, 2019. "Disentangling the drivers of carbon prices in China's ETS pilots — An EEMD approach," Technological Forecasting and Social Change, Elsevier, vol. 139(C), pages 1-9.
    6. Simon Quemin & Raphael Trotignon, 2018. "Competitive Permit Storage and Market Design: An Application to the EU-ETS," Working Papers 2018.19, FAERE - French Association of Environmental and Resource Economists.
    7. Sato, Misato & Rafaty, Ryan & Calel, Raphael & Grubb, Michael, 2022. "Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System," LSE Research Online Documents on Economics 115431, London School of Economics and Political Science, LSE Library.
    8. Pichler, Paul & Sorger, Gerhard, 2018. "Delegating climate policy to a supranational authority: a theoretical assessment," European Economic Review, Elsevier, vol. 101(C), pages 418-440.
    9. Frondel, Manuel & Kaeding, Matthias & Sommer, Stephan, 2022. "Market premia for renewables in Germany: The effect on electricity prices," Energy Economics, Elsevier, vol. 109(C).
    10. Willner, Maximilian, 2018. "Consulting the chrystal ballː Firm's foresight and a cap-and-trade scheme with endogenous supply adjustments," WiSo-HH Working Paper Series 46, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    11. Qunwei Wang & Cheng Cheng & Dequn Zhou, 2020. "Multi-round auctions in an emissions trading system considering firm bidding strategies and government regulations," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 25(7), pages 1403-1421, October.
    12. Grebel, Thomas & Islam, Rohidul, 2022. "Endogenous cap reduction in Emission Trading Systems," Ilmenau Economics Discussion Papers 169, Ilmenau University of Technology, Institute of Economics.
    13. Yang Liu & Xueqing Yang & Mei Wang, 2021. "Global Transmission of Returns among Financial, Traditional Energy, Renewable Energy and Carbon Markets: New Evidence," Energies, MDPI, vol. 14(21), pages 1-32, November.

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