Carbon prices in the EU ETS have risen from around 5 euro per ton of CO2 in 2017 to above 90 euro in 2021. One probable explanation is the cancellation mechanism implemented along with the Market Stability Reserve (MSR) of the EU ETS in 2018. We identify realistic conditions under which the MSR results in truly massive cancellation of emissions allowances, pointing to the steepness of the emissions pathway over time as essential. A flattening of the emissions pathway implies huge reduction in cumulative emissions, suggesting much higher ETS prices. The concerns about too low and `ineffective’ carbon prices may turn into concerns for too high prices. The results have important ramifications for planned revisions of the EU ETS.
Environmental Research Letters (forthcoming),
2022
The Market Stability Reserve (MSR), implemented in 2018 to complement the EU emission trading system (EU ETS), is designed such that the supply of allowances responds endogenously to demand. We show that an endogenous cap such as the MSR produces a Green Paradox. Abatement policies announced early but realized in the future are counter-effective because of the MSR: they increase cumulative emissions. We present the mechanisms in a two-period model, and then provide quantitative evidence of our result for an annual model disciplined on the price rise in the EU ETS that followed the introduction of the MSR. Our results point to the need for better coordination between different policies, such as the European Green Deal. We conclude with suggestions to improve the workings of an endogenous cap, ahead of the MSR review scheduled for 2021.
Economic Policy,
2021
We compare the decrease in European energy demand and CO2 emissions during the financial crisis 2008-2009 with the COVID-19 expected drop in demandand emissions, and the price response of the EU Emission Trading System (EU ETS). We ask whether the rather limited current price reduction may be due tothe Market Stability Reserve (MSR), implemented in the EU ETS between thetwo crisis. Stylized facts and basic theory are complemented with simulations based on a model of the EU ETS. Together, they suggest a mixed result. The MSR stabilizes the EU ETS price in turbulent times, but less than perfectly. We show that the more persistent the COVID-19 shock is, the less the MSR is able to serve its purpose.
Environmental and Resource Economics,
2020
By manipulating EU ETS through the Buy, Bank, Burn program, unregulated emissions are compensated while a substantial part of the burden is levied on regulated sectors. This distorts the balance between regulated firms and non-regulated projects, allowing climate-conscious consumers to be virtuous at the cost of others.
Nature Climate Change,
2019
