The Future of the EU-ETS

For instructors who include a module on the European Union’s Emissions Trading Scheme (EU-ETS), the European Energy Review, one of my favorite sources for information on energy and climate issues on the continent, published an excellent article last month on the ETS, whose fate, the article concludes “hangs in the balance in the EU.”

Among the take-aways from the article:

  1. The EU Energy Commission has argued that the EU carbon price of 6 euros is insufficient to drive low-carbon investments on the continent; however, a carbon price of more than 20 euros would be deemed unacceptable to European industry in the current economic climate;
    1. The EU-ETS has resulted in declines in GHG emissions, and is slated to  reduce emissions from the energy and industrial sectors by 21% below 2005 levels by 2020
  2. The two primary reasons cited by analysts for low carbon prices in the EU are the recession and the overlap of the EU-ETS with other decarbonization policies, especially the EU Renewable Energy. Renewables reduce carbon prices but not emissions because they don’t have an impact on the cap established under the EU-ETS;
  3. Perhaps the most viable solution to low carbon prices is a proposal to set aside (withdraw from the market) as many as 1.4 billion euros in the EU-ETS carbon market. This could set the EU on a course to reduce its GHG emissions by 30% by 2020;
    1. A 1.4 billion allowance removal would likely result in EU carbon prices rebounding to 20 euros a ton and increase revenues in member States by 20 billion euros annually;
    2. However, some analysts content that a set-aside would engender market uncertainty in carbon markets and a precedent for additional political intervention, though Commission officials maintain this would be a one-off action
  4. Some stakeholders, including the International Emissions Trading, have suggested an alternative set-aside approach, emphasizing automatic adjustments based on economic conditions, technological changes and overlapping policies. Others have suggested that we should ratchet up the so-called linear reduction factor, that is the rate of decline of the cap, which is currently set at 1.74% annually.

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