The Role of Emissions Trading in the Energy Transition
Perspectives and Limitations on Current Reform Proposals
Emissions trading is often seen as the flagship project of European climate policy. For some time, however, this flagship has been dangerously listing to one side. To keep it from capsizing, it has been repositioned several times - and is once again now in the dry dock. Its repair hinges on ensuring that the basic principle of emissions trading once again functions as it should, i.e. to create a scarcity price for CO2 by limiting the number of emissions allowances on the market, thereby incentivizing investment in low-carbon technologies. Because too many allowances have been allocated, scarcity has never existed. The large surplus of certificates is undermining this principle and rendering emissions trading ineffective as a tool for climate protection. This background paper focuses on the following questions: How will the number of excess certificates develop in the coming years? And are the current proposals for reforming the emissions trading system enough to reduce surpluses and to achieve a scarcity price?
Without a fast-acting reform, emissions trading as a tool for European climate policy is dead.
Currently, EU emissions trading has a structural surplus of 2.5 billion certificates, which will grow to 3.8 billion by 2020 and without reform will reach 3.4 billion by 2030. Without structural reform, the CO2 price will remain permanently under 5 euros per tonne.
Of crucial importance will be the design of the market stability reserve (MSR), on which the EU will decide in 2015.
The proposed development toward a flexible market-quantity mechanism for the emissions trading system (price-quantity control as opposed to pure ex-ante quantity control) offers an opportunity to save the system.
Expanding emissions trading through national instruments is necessary, latest by 2020.
Even if an ambitious design for the MSR is chosen, it will have only limited effects on CO2 by 2020. Therefore, an additional national measure, similar to the British Carbon Support Mechanism, will be needed in order to reach Germany’s climate protection target of a 40 percent reduction in greenhouse gases by 2020 over 1990.
A review mechanism is urgently needed for the MSR, which takes into consideration potential unforeseen developments.
While the EU Commission assumed continuous growth and rising electricity usage in their calculations for the MSR, this is currently not expected. Other trends could also evolve contrary to expectations.
Dr. Patrick Graichen, Markus Steigenberger, Philipp Litz
Agora Energiewende (2015): The Role of Emissions Trading in the Energy Transition. Perspectives and Limitations on Current Reform Proposals.