Save the EU Emissions Trading Scheme: set a price band

In the online magazine “Energy Post” Ottmar Edenhofer, director of the Mercator Research Institute on Global Commons and Climate Change (MCC), warns – together with Brigitte Knopf of the Potsdam-Institute for Climate Impact Research (PIK) - that a failure to make the ETS work could wreck the entire EU climate and energy policy. If the ETS is to be saved, EU policymakers must instead take the bold step of establishing a price band for CO₂ emission rights.

“The proposed MSR does not address the problem of long-term cost-effectiveness and price uncertainty. The MSR is a quantity-based instrument that addresses the existence of a large allowance surplus, but oversupply does not disappear until 2030”, they write. “Given the difficulties of establishing long-term political credibility, the best approach is to directly manage expectations of market participants. Therefore, a better alternative would be to add price-triggers that establish the boundaries of political intervention.”

Combining the best of the two different systems, cap-and-trade as well as taxation, could be done by introducing a price band or collar to the ETS in form of a lower and upper boundary on the price, both of which increase over time. “A price collar can immediately deliver a stable and sufficiently high allowance price. In addition, it is a useful way to manage expectations of future prices in line with the long-term cap of the EU ETS”, Edenhofer and Knopf argue. These alternative solutions to the MSR are also addressed in a new policy position paper from the Energy Platform of Euro-CASE (the European Council of Academies of Applied Sciences).

 

You can access the online article here.