Policy Paper 4: A Price Floor Solution to the Allowance Surplus in the EU ETS 2014/04/07
Dallas Burtraw, Åsa Löfgren and Lars Zetterberg
Since 2008 there has been a rapid buildup of surplus emissions allowances in the EU ETS. The European Commission has presented six structural options to addressthe oversupply of allowances on a long-term basis.
One option would introduce price management mechanisms, which could allow for the use of a price floor. A price floor has been mischaracterized as a tax, an instrument that has historically faced political opposition, and the commission states that an explicit carbon price objective would alter the nature of the EU ETS being a quantity-based market instrument.However, a price floor is structurally different from a tax in multiple ways, and its merits are well documented in the academic literature. This rule-based approach could reinforce the market-based philosophy and investment climate of the ETS.