Why Europe still needs a carbon price floor
In a new Policy Paper co-authored by the MCC, researchers confront five common “myths” against a carbon price floor in the EU ETS.
After announcement of the reform of the European Emissions Trading System (EU ETS) in early 2018, the price for emission allowances has risen to 20-25 Euros per ton of CO2 – a level broadly in line with European climate targets. However, the recent price hike may be short-lived, argue scientists of the Mercator Research Institute on Global Commons and Climate Change (MCC). In a new policy paper, they recommend the introduction of a price floor as an “important addition to the design of the ETS, helping to safeguard against low or declining prices in the future”. The paper was co-authored by researchers of the Potsdam Institute for Climate Impact Research, Resources for the Future, the Centre for European Policy Studies, VU Amsterdam and IVL Swedish Environmental Research Institute.
A common explanation for the sharp price increase over the last months is based on the future removal of allowances – an important element of the reform – leading to a reduced supply of permits. This has restored market confidence in the willingness of EU policymakers to pursue ambitious climate policy, according to this narrative. However, the authors led by MCC group leader Christian Flachsland argue that it is uncertain whether the reform has actually resolved the problems of the EU ETS. “It might as well be a temporary bubble in an overconfident market”, they write. “A persistent risk that market confidence may be undermined again” remains. In the event of “future economic or political shocks”, the price might fall significantly.
A carbon price floor in the ETS as introduced, for example, in California (USA), Quebec (Canada) or in the Regional Greenhouse Gas Initiative (RGGI) in the Northeastern United States, would help sustain a sufficiently high carbon price over the long term, the authors argue. This would stimulate necessary low-carbon investments. The paper then confronts five “myths” against the introduction of an EU ETS price floor based on the current state of research. The scientists refute arguments that, for example, draw on the alleged legal infeasibility of the price floor or on political fragmentation potentially resulting from unilateral carbon price floors.