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The European Emissions Trading System (EU ETS): Ex-Post Analysis, the Market Stability Reserve and Options for a Comprehensive Reform

Author

Listed:
  • Brigitte Knopf

    (Potsdam Institute for Climate Impact Research)

  • Nicolas Koch

    (Mercator Research Institute on Global Commons and Climate Change; Berlin)

  • Godefroy Grosjean

    (Potsdam Institute for Climate Impact Research)

  • Sabine Fuss

    (Mercator Research Institute on Global Commons and Climate Change, Berlin and International Institute for Applied Systems Analysis, Laxenburg)

  • Christian Flachsland

    (Mercator Research Institute on Global Commons and Climate Change, Berlin)

  • Michael Pahle

    (Potsdam Institute for Climate Impact Research)

  • Michael Jakob

    (Potsdam Institute for Climate Impact Research and Mercator Research Institute on Global Commons and Climate Change, Berlin)

  • Ottmar Edenhofer

    (Potsdam Institute for Climate Impact Research, Mercator Research Institute on Global Commons, Berlin and Climate Change and Technische Universität, Berlin)

Abstract

The central pillar of European climate policy, the European Emissions Trading System (EU ETS), is currently under scrutiny, as the allowance price is persistently low at around 5€/tCO2. The cap was met and emissions actually declined in recent years, ensuring the environmental effectiveness of the scheme. However, the low price may affect the long-term cost-effectiveness of the instrument by reducing the incentive for investment and deployment of low carbon technologies. No significant increase in the allowance price is expected before 2020, and probably not beyond, without reform. While the reasons for the price decline are controversial, empirical analysis shows that only a small portion of price fluctuations can be explained by factors such as the economic crisis, renewable deployment or international offsets. Therefore, it is likely that political factors and regulatory uncertainty have played a key role in the price decline. As a consequence, any reform of the EU ETS has to deliver a mechanism that reduces such uncertainty and stabilizes expectations of market participants. The Market Stability Reserve proposed by the EU Commission is unlikely to address the current problem of price uncertainty and insufficient dynamic efficiency. The key element of the alternative reform proposal described in this paper is to set a price collar in the EU ETS with lower and upper boundaries. This is likely to reinforce the long-term credibility and reliability of the price signal. In addition, a price for GHG emissions not covered by the EU ETS has to be set. If additional market failures prevent the market from functioning efficiently, specific policy instruments related to innovation and technology diffusion should be implemented in addition to carbon pricing. Carbon leakage could be addressed through tailor-made trade policies. In parallel, increasing the coalition of countries included in the carbon pricing should remain a priority. This reform package would bring the EU ETS back to life, while avoiding a relapse into potentially costly and inefficient national climate and energy policies.

Suggested Citation

  • Brigitte Knopf & Nicolas Koch & Godefroy Grosjean & Sabine Fuss & Christian Flachsland & Michael Pahle & Michael Jakob & Ottmar Edenhofer, 2014. "The European Emissions Trading System (EU ETS): Ex-Post Analysis, the Market Stability Reserve and Options for a Comprehensive Reform," Working Papers 2014.79, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2014.79
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    References listed on IDEAS

    as
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    1. repec:bla:scandj:v:121:y:2019:i:2:p:446-481 is not listed on IDEAS
    2. repec:eee:resene:v:49:y:2017:i:c:p:33-47 is not listed on IDEAS
    3. Oskar Lecuyer & Philippe Quirion, 2016. "Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation," Working Papers 2016.14, FAERE - French Association of Environmental and Resource Economists.
    4. Spash, Clive L. & Theine, Hendrik, 2016. "Voluntary Individual Carbon Trading," SRE-Discussion Papers 5206, WU Vienna University of Economics and Business.
      • Clive L. Spash & Hendrik Theine, 2016. "Voluntary Individual Carbon Trading," SRE-Disc sre-disc-2016_04, Institute for Multilevel Governance and Development, Department of Socioeconomics, Vienna University of Economics and Business.
    5. Jan Abrell & Sebastian Rausch & Hidemichi Yonezawa, 2019. "Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 446-481, April.

    More about this item

    Keywords

    EU ETS; Emissions Trading; Carbon Price; Price Collar; Market Stability Reserve; Credibility;

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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