Reforming the EU emissions trading system: An alternative to the market stability reserve

Abstract

Prices for emission allowances in Europe’s Emissions Trading System (ETS) have remained low for many years. This fact has given rise to controversies on whether there is a need for a fundamental reform of the ETS. Potential reform proposals include the introduction of a price floor for certificates and a market stability reserve (MSR), which is a rule-based mechanism to steering the market volume of allowances and the preferred approach of the European Commission. With the introduction of the MRS, the Commission aims at increasing and stabilizing certificate prices in the medium- and long-term. In this article, we alternatively recommend retaining the ETS as it is, rather than supplementing it by introducing a minimum price floor or a market stability reserve. Instead, mistakes from the past should be corrected by a single intervention: the final elimination of those 900 million allowances that were taken out of the market in 2014, but would again emerge in the market in 2019 and 2020 via backloading.