A coalition for the minimum price

The German climate targets for 2020 could be achievable with a minimum price in the EU ETS. Europe can learn from California and others in this respect, a new MCC policy paper recommends.

CO2 pricing, emissions trading, EU ETS, Emmanuel Macron

Photo: Shutterstock / ramcreations

24.11.2017

With currently seven euros per ton of CO2, the price in the European Emissions Trading System (EU ETS) is too low to incentivize more investment in low-carbon technologies. This threatens compliance with the German and European climate targets. The EU should now take countermeasures and quickly introduce a minimum price to the EU ETS. This is the recommendation of a new policy paper co-authored by the Mercator Research Institute on Global Commons and Climate Change (MCC), the Potsdam Institute for Climate Impact Research (PIK) and the European Climate Foundation (ECF).

An initiative for a minimum price on the European level would be reasonable as in this way carbon leakage could be avoided. Moreover, it would be an important signal for international climate negotiations. If a broad consensus is not possible, a coalition of some EU countries should go ahead, the scientists argue – among them MCC Director Ottmar Edenhofer and MCC group leader Christian Flachsland.

Although there is an allowance cap implemented in the current system, this does not result in sufficiently high carbon prices. If prices remain low for a longer period they must eventually increase drastically to comply with the cap, which decreases over time. However, it is unlikely that policy makers will let this happen. Market participants are already betting on a relaxation of the cap. As a consequence, carbon prices are low and the use of fossil fuel is cheap. Necessary investments in low-carbon assets do not take place at the required scale.

For this reason, a minimum auction price has been implemented in the emissions trading systems in California and the Northeastern states of the US several years ago. The United Kingdom, too, introduced such a minimum price—in addition to the EU ETS. There, it helped phasing out coal.

In order to stabilize market expectations and consequently create more incentives for low-carbon investments, the price floor should increase over time. Using the additional revenues generated from higher auction prices, less ambitious countries could be compensated and thus brought on board, the scientists suggest. The quick introduction of a price floor to the EU ETS would also make it more likely for Germany to reach its 2020 climate targets—which the country is about to miss if emissions do not fall sharply within the next two years. An expert commission should be implemented quickly to propose implementation options and clarify effects on emissions, state revenues, and legal issues.