EU’s Emissions Trading System, EU ETS is questioned, mainly due to a large surplus of pollution allowances. This depresses emission prices, to around 6 Euro per tonne carbon dioxide. As a measure to strengthen the system the EU Commission in January has proposed a market reserve, a kind of central bank for allowances into which 12 per cent of the surplus each year can be backloaded to be made available again when the surplus decreases. The proposal is now under discussion by the EU countries.
– We have previously suggested that it might be more efficient to scrap pollution allowances and in this way restore the system. But resistance to this seems to be too compact for it to be implemented. The Commission proposal for a market stability reserve is perhaps the easiest way to attain political consensus. But in that case the Commission's proposals must be designed to be as effective as possible, says Daniel Engström Stenson from the Fores think tank.
A new report from IVL Swedish Environmental Research Institute and Fores analyses the Commission's proposal. The authors conclude that the reform could ultimately contribute to a more stable market and a higher price, but that the risks involved are still many.
– The proposal is designed to reduce any risk of creating an outsized surplus. In addition the MSR will not be introduced until 2021, and it will probably be at least ten years before the current surplus reaches the 800 million allowances trigger threshold. In order to strengthen the system and avoid further damaging confidence the proposal should be implemented earlier, says Lars Zetterberg from IVL Swedish Environmental Research Institute.
In addition, the authors point out that the 900 million allowances temporarily removed from the system via so-called backloading should not be returned to the market in 2019 and 2020 as planned.
– If a further 900 million allowances are introduced into the market at this time, it will take even longer before the market stabilises, partly because we run the risk that the price will fall even more during these years. Therefore, all countries should agree that pollution allowances should be backloaded directly into the emissions reserve, making it possible for them to be portioned out over a lengthier period. In the long term this will lead to more cost-effective emission reductions, says Susanna Roth at IVL Swedish Environmental Research Institute.
You can download the report here. (pdf, 1.3 MB)
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