The European Emissions Trading System
The EU Emissions Trading System (EU ETS) is Europe’s flagship carbon pricing instrument and, as the world’s pioneer approach, it offers unique opportunities to distill lessons for the operation and design of existing and emerging cap-and-trade schemes all around the globe. Our research seeks to provide tangible ex post evaluations of the achievements and problems of the current EU ETS design as well as careful research on the reform space.
One focus of our research is how the EU ETS pricing mechanism works. The sharp and persistent price decline in the policy program has sparked intense debates about the decisive permit price drivers. We show that there is no single cause for the low permit price and that demand fundamentals can explain only about 10% of the price change variations. More recently, we have presented a careful analysis of how the political process of making cap adjustments has shaped market outcomes in the EU ETS. Our evidence suggests mere speculation about the political commitment to the indicated cumulative cap will translate into the permit price-setting process.
Guided by our empirical work and following a workshop, we have explored different reform options for the EU ETS in a policy report under a mandate from the European Council of Academies of Applied Sciences, Technologies and Engineering (Euro-CASE). In particular, we proposed to implement a price collar instead of the Market Stability Reserve. A price collar could not only reinforce the credibility and reliability of the price signal. It would also allow Member States to adopt unilateral policies (e.g. renewable supporting schemes or efficiency standards) that could actually contribute to an overall emissions reduction at the EU level. This report was widely disseminated to stakeholders in Brussels and presented to Jos Delbeke, the Director General for climate policy at the European Commission.
We also offer a framework to clarify whether delegation responds to various concerns with respect to the EU ETS. Delegation to a carbon central bank might enhance flexibility under unforeseen circumstances, decrease policy uncertainty, and increase the credibility of long-term policy commitments.
Our current research focuses on firm behavior in the EU ETS to better understand competitiveness effects and distributional implications of the policy. Providing evidence on these matters seems particularly useful given the often intense political and lobbying pressures governments face when formulating climate policy. We also work on carbon pricing in European agriculture and the role of offsets in cap-and-trade schemes.
Relevant Material
Grosjean, G., W. Acworth, C. Flachsland, R. Marschinski (2016): After Monetary Policy, Climate Policy: Is Delegation Key to EU ETS reform? Climate Policy 16: 1–25.
Edenhofer, O. (2014). Climate policy: Reforming emissions trading. Nature Climate Change 4: 663–664.
Grosjean, G., Fuss, S., Koch, N., Bodirsky, B., De Cara, S., Acworth, W. (2016): Agriculture: sleeping beauty of EU climate policy? Overcoming barriers to implementation. SSRN Working Paper 2734677.
Koch, N., Reuter, W., Fuss, S., Grosjean, G. (2016): Permits vs. Offsets Under Investment Uncertainty. SSRN Working Paper 2711321.
