EU ETS stability mechanism needs new design
Grischa PERINO, Michael PAHLE, Fabian PAUSE, Simon QUEMIN, Hannah SCHEUING, Maximilian WILLNER (2021)
Reforms in 2015 and 2018 fundamentally changed the design of the EU ETS. The Market Stability Reserve (MSR) was created to increase resiliency to demand shocks, deliver investment signals and raise synergies with other climate and energy policies by adjusting both medium-term allowance supply and the long-run cap based on market outcomes.
The 2018 reform renewed confidence in the EU ETS, permanently removing historic surplus, curbing emissions substantially and raising prices to the range of 20-40 EUR/ton. Having achieved some key objectives, priorities are likely to change towards sustaining market stability, inducing investment incentives, ensuring synergies with overlapping policies and reducing regulatory uncertainty. However, in Phase IV the current design of the MSR could threaten these objectives and thereby undermine the EU ETS. With the EU poised to step up its climate targets, it is essential that the design of the EU ETS is prepared for the challenges ahead.
In the following paper we identify the risks that arise from the current design of the MSR and propose a feasible way to address them in the upcoming review of the EU ETS. (-> Download full text)