Minimum price best option for reform of EU Emissions Trading System

Structural reform of the EU ETS

In November 2012, the European Commission put forward six options for a more structural reform of the EU ETS. The proposed options vary from reducing the cap and expanding the ETS to include other sectors, to strengthening the ETS by measures directly affecting allowance prices. The Dutch Ministry of Infrastructure and the Environment (IenM) asked the PBL Netherlands Environmental Assessment Agency to assess the impact of these options.

Options for reform

Four categories of options for reforming the ETS were evaluated:

1. reducing the supply of emission allowances;
2. expanding the ETS by including other sectors;
3. a minimum price for auctioned allowances;
4. combining ETS with a carbon tax.

Minimum price makes ETS more robust

All options analysed reduce emissions and cause the emission price to increase. A minimum price on carbon, however, provides the best opportunity to make the ETS more robust to unforeseen events, such as a further deterioration of the economy. Such a minimum price would result in more emission reductions if abatement proves to be cheaper than expected. Moreover, it would provide a more predictable price path, which is particularly helpful for companies investing in low-carbon technologies. Other cap-and-trade systems in the world, such as in California and Australia, also have a minimum price in place.

Backloading rejected by European Parliament

Last week, the European Parliament voted against the European Commission's proposal to temporarily set aside emission allowances. In an earlier assessment of this proposal, PBL concluded that the impact of this backloading proposal on CO₂ prices is likely to be limited, because the total amount of allowances up to 2020 would remain unchanged.

A key, yet flawed instrument

The EU Emissions Trading System (EU ETS) is a key instrument of EU climate policy, providing a clear reduction pathway for CO₂ emissions. The current carbon price (of about 3 euros per tonne of CO₂) is much lower than previously expected (which was around 30 euros) and is likely to remain low for a long time. This fuels doubts about whether the ETS can remain a key policy instrument in the long term. Such doubts also increase investment uncertainty, which is likely to have a negative impact on further investments in low-carbon technologies needed for a low-carbon economy in 2050.