Nach oben pdf The Legal and Economic Case for an Auction Reserve Price in the EU Emissions Trading System

The Legal and Economic Case for an Auction Reserve Price in the EU Emissions Trading System

The Legal and Economic Case for an Auction Reserve Price in the EU Emissions Trading System

Abstract When it was launched in 2005, the European Union emissions trading system (EU ETS) was projected to have prices of around €30/ton CO2 and to be a cornerstone of the EU’s climate policy. The reality was a cascade of falling prices, a ballooning privately held emissions bank, and a decade of low prices providing inadequate incentive to drive investment in the technologies and innovation necessary to achieve long-term climate goals. The European Commission responded with administrative measures, including postponing the introduction of allowances (backloading) and using a quantity-based criterion for regulating future allowance sales (the market stability reserve); although prices are beginning to recover, it is far from clear whether these measures will adequately support the price into the future. In the meantime, governments have been turning away from carbon pricing and adopting overlapping regulatory measures that reinforce low prices and further undermine the confidence in market-based approaches to addressing climate change. The solution in other carbon markets has been the introduction of a reserve price that would set a minimum price in allowance auctions. Opponents of an auction reserve price in the EU ETS have expressed concern that a minimum auction price would interfere with economic operations in the market or would be tantamount to a tax, which would trigger a decision rule requiring unanimity among EU Member States. This Article reviews the economic and legal arguments for and against an auction reserve price. Our economic analysis concludes that an auction reserve price is necessary to accommodate overlapping policies and for the allowance market to operate efficiently. Our legal analysis concludes that an auction reserve price is not a “provision primarily of a fiscal nature,” nor would it “significantly affect a Member State’s choice between different energy sources.” We describe pathways through which a reserve price could be introduced.
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Linking the Swiss Emissions Trading System with the EU ETS: Economic Effects of Regulatory Design Alternatives

Linking the Swiss Emissions Trading System with the EU ETS: Economic Effects of Regulatory Design Alternatives

The CGE literature has neglected participation thresholds, leaving the issue for discussions among lawyers and lobbyists. We are not aware of any CGE simula- tions that address the issue. In contrast, CGE modelers have intensively looked at the question what share of emission permits should be auctioned. Most publi- cations emphasize the existence of windfall profits from grandfathering and con- trast them with positive welfare effects of auctioning when revenues are recycled such that overall efficiency increases, see e.g. Edwards and Hutton (2001) for the UK, Goulder et al. (2010) for the USA. Jensen and Rasmussen (2000) show the same qualitative results for Denmark, but also underline for the case of full auctioning the high adjustment costs in energy-intensive industries e.g. in terms of stranded investment. It is thus important to consider both sectoral effects and economy-wide welfare effects.
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Reforming the European Union Emissions Trading System (EU ETS)

Reforming the European Union Emissions Trading System (EU ETS)

The policy-event dummies give us some evidence, although limited, that regulatory uncertainty might play a role in price forma- tion. This finding, if confirmed, would imply different reform options than the ones merely aimed at adjusting to short-term shocks (e.g. due to economic downturn or large renewable deployment). Such reform options should seek to stabilize the expectations of market partici- pants. From this perspective, two types of approaches are discussed in the literature: (i) reducing policy uncertainty and (ii) decreasing the long-term commitment problem ( Brunner et al., 2012 ). The former induces for instance the establishment of mid- to long-term legally binding CO 2 emissions reduction targets. The current debate is focusing on the 2030 targets but to ensure long-term cost effective- ness, it might be necessary to provide to market participants a long- term decarbonization pathway. Nonetheless, as discussed in Grosjean et al. (2014) such a strategy might not be suf ficient to bring the necessary level of stability to the expectations of market participants. Tackling the long-term commitment problem in order to stabilize expectations is a delicate task. In monetary policy, the experience has favored delegation in setting the money supply as a tool to overcome the problem ( Barro and Gordon, 1983; Kydland and Prescott, 1977; Rogoff, 1985 ). In the context of the reform of the EU ETS, one could foresee the delegation of the governance of the carbon market to an independent authority whose goal would be to ensure that the short-term EUA price is in line with long-term target (e.g. Clò et al., 2013; de Perthuis and Trotignon, 2013 ). However, this will not be without dif ficulties. The exact mandate of this institution as well as the instrument used to achieve its goal will not be easily de fined ( Grosjean et al., 2014 ). Nonetheless, what an independent authority may achieve is a smoother decision-process for making reforms as well as locating the decision outside of the political sphere ( Newell et al., 2012 ). This might create more stable expectations on the way decisions are taken over time, even if the goals are modi fied to adapt to new information and circumstances.
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The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment

The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment

In general, a policymaker’s mandate is primarily dictated by the specific objectives of the system it regulates (e.g. to achieve a certain level of emissions reduction with or without also defending a price interval). Ultimately, however, the policymaker’s role is to ensure that its cap-and-trade system enables compliance entities to meet their obligations at minimum costs. Economic theory provides insights into how systems can be designed to facilitate cost minimisation. For example, several studies have explored the effect of banking and borrowing pro- visions as cost ‘smoothing’ mechanisms ([Rubin, 1996], [Schennach, 2000], and [Fankhauser and Hepburn, 2010] for a comprehensive overview of the literature). However, these mechanisms alone may not be sufficient when the market is faced with severe uncertainty. In the presence of this market uncertainty, current investment decisions are harder to make and as a consequence, long-term abatement may occur at higher overall costs. The policymaker’s challenge thus quickly amplifies once markets are recognised as inherently unstable. Further- more, the drivers of market uncertainty are hard to untangle and the impacts of such uncertainties are no easier to control. Notwithstanding, it is possible to design policy mechanisms that can help mitigate these impacts in a way that a non-intervention policy design (such as temporal provisions) alone could not achieve. In the language of [Minsky, 1986], institutions and regulations can be designed to constrain instability.
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Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme

Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme

COMPUTATIONAL STRATEGY.—– Based on Mathiesen ( 1985 ) and Rutherford ( 1995 ), we formulate the model as a mixed complementarity problem (MCP). We formu- late the model as a system of nonlinear inequalities and represent the economic equilibrium through two classes of conditions: zero profit and market clearance. The former class determines activity levels and the latter determines price levels. In equilibrium, each of these variables is linked to one inequality condition: an activity level to an exhaustion of product constraint and a commodity price to a market clearance condition. Importantly, the complementarity-based formulation of our numerical model enables us to endogenously represent corner solutions in equilibrium; for example, as will become evident below, it is important to ac- count for the possibility of “unbinding” national (non-ETS) carbon markets with zero carbon prices. Numerically, we use the General Algebraic Modeling System (GAMS) software and the higher-level language MPSGE ( Rutherford , 1999 ) and the PATH solver ( Dirkse and Ferris , 1995 ) to solve the MCP problem.
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Economic models for assessing the economic effects of linking emissions trading schemes

Economic models for assessing the economic effects of linking emissions trading schemes

The existing energy system is likely to remain largely the same in the short run due to long investment planning and operation cycles. This means that technological change takes its time to translate into changes in the carbon price. Facing a trade-off between technological level of detail (mostly PE mod- els) and broad coverage of sectors at a level disaggregated enough for a meaningful analysis with en- dogenous GDP (mostly CGE and econometric models), one should favour a disaggregated sectoral cov- erage. The latter models have the further advantages that they take interaction and interdependences between all sectors into account (i.e. interdependences in production and MACC between ETS- and non-ETS-sectors) CGE models and econometric models are hence very useful to analyse short-term effects of linking when technologies do not change significantly (Hedenus et al. 2012, p.2). However, if partial effects or technological details are of interest, CGE modelling might be complemented with PE models, for example in a case where dynamic changes in technologies such as an increased share of renewable energies would be not covered in an CGE.
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The impact of administrative transaction costs in the EU emissions trading system

The impact of administrative transaction costs in the EU emissions trading system

aspects. 8 This represents a trade-off between broad coverage of emissions and the avoidance of large MRV transaction costs per unit of emissions for some regulated companies. A possible way to decrease transaction cost burdens while preserving effectiveness and broad coverage of regulation would be a strict ‘upstream’ policy design (Joas & Flachsland, 2014; Kerr & Duscha, 2015). In the EU ETS, regulation takes place at the installation level in an ‘end of the pipe’ manner. This makes the inclusion of small installations necessary. Under upstream regulation (as interpreted here), the carbon content of intermediate products (e.g. fossil fuels) is ‘priced’ by the upstream regulation system in the moment the products are put on the market (Kerr & Duscha, 2015). In this case, greenhouse gas emissions are ‘priced’ at the source and not at the level of final (commercial) consumers. In this situation, the overall prices of carbon- intensive intermediate products incorporate the carbon price in case the products are resold. Such
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Long-Term Effects of Climate Campaigns on Total Greenhouse Gas Emissions under Cap-and-Trade Schemes: The Example of the EU Emissions Trading System and the Market Stability Reserve

Long-Term Effects of Climate Campaigns on Total Greenhouse Gas Emissions under Cap-and-Trade Schemes: The Example of the EU Emissions Trading System and the Market Stability Reserve

14 allowances in circulation” (Decision (EU) 2015/1814, 2015, L 264/2), which is also called “bank” in the literature as it refers to the allowances that are currently unused and “banked for future use” (Perino, 2018, p. 263). Specifically, when there are more than the upper threshold of 833,33 million 2 allowances in circulation on the 31 st December of a particular year, then in the following year, the number of allowances which are auctioned is reduced by 24 % of the number of allowances banked and these allowances are placed in the MSR (Decision (EU) 2015/1814, 2015; Directive (EU) 2018/410, 2018). After 2023, a rate of 12 % instead of 24 % applies (ibid.). To be more precise, “[i]f the bank, […], exceeds 833 million at the end of a given year (in 2017 or later), then the number of allowances auctioned in the 12 months following October of the following year (but not before January 2019) is reduced by a certain percentage of the size of the bank” (Perino et al., 2020, p. 27). However, although this is more precise and should be kept in mind, for the sake of simplicity, in the following the formulation is used that the intake of al- lowances into the MSR depends on the bank of the previous year, since this version is also predominantly used in the literature (e. g. Bocklet et al., 2019; Gerlagh et al., 2019; Perino, 2018; Rosendahl, 2019a; Tietjen et al., 2019). This continues each year until the allowances in circulation are less than 833,33 million (Decision (EU) 2015/1814, 2015). If they fall even below the lower threshold of 400 million allowances, in each following year, 100 million allowances are released, i. e. they leave the MSR and are added to the auction volume (ibid.). This is done until the reserve is empty, i. e. if there are less than 100 million allowances in the MSR, all remaining allowances are released (ibid.). With this, the MSR would only delay the supply of allowances and the long run cap would be unaffected (Kollenberg & Taschini, 2019; Perino & Willner, 2015, 2016, 2017, 2019). But as an essential additional rule, the cancelation mechanism was adopted in 2018: From 2023 onwards, the MSR has an upper limit which corresponds to the total number of allowances auctioned in the previous year. This means that the number of allowances corresponding to the difference between the number of allowances in the MSR before and the number of allowances auctioned in the last year lose their validity, i. e. get canceled each year (Directive (EU) 2018/410, 2018). Therefore, the cap of the EU ETS is no longer fixed but endogenous and a result of the market outcome (Beck & Kruse-Andersen, 2020;
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Using emissions trading schemes to reduce heterogeneous distortionary taxes: The case of recycling carbon auction revenues to support renewable energy

Using emissions trading schemes to reduce heterogeneous distortionary taxes: The case of recycling carbon auction revenues to support renewable energy

If auction revenues are used to support RE and reduce the levy, the distortionary effect is diminished and there is a relative GDP improvement (-0.1% GDP loss instead of 0.2%). The ETS price rises (+1.6% if no levy exemption applies, +1.8% if ETS sectors are exempted) as a result of the higher electricity demand, but a reduction of the climate constraint (−4.6% if no levy exemption applies, −5.9% if ETS sectors are exempted) is observed in the non-ETS sectors, which can use more electricity. The impact on each economic sector is a combination of three effect: a positive income effect associated with the electricity levy reduction for the industrial electricity consumers, a loss induced by higher energy and carbon prices for the most energy intensive sectors, an increased demand from the whole economy. For the non-ETS sectors, the outcome is either balanced or positive but, in all cases, small. The impact on the ETS sectors depends on the exemption rules. If they have to pay the electricity levy, the recycling of the auction revenues to support RE results in a positive income effect for them and leaves them better off. On the contrary, if the ETS sectors are exempted, the use of auction revenues to subsidize renewable electricity generation leaves the most energy intensive ones worse off. Despite an increase in the demand from the non-ETS sectors that have to pay the electricity levy and are better off when the latter is reduced (e.g. demand for fertilizers by the agricultural sector), some of the ETS sectors that benefit from a levy exemption see their benefit from the exemption reduced due to increased carbon and energy prices. That is for example the case of the cement, iron and steel, glass, and aluminium sectors.
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Designing emissions trading in practice general considerations and experiences from the EU Emissions Trading Scheme (EU ETS)

Designing emissions trading in practice general considerations and experiences from the EU Emissions Trading Scheme (EU ETS)

4 demand on markets. Reduction efforts by companies are not defined by the regulating authority as under a command and control regime. Hence, liquid and transparent markets are of great importance. Transparency in markets (about prices and traded volumes) is beneficial as it provides information to all market participants. In the US SO2 trading program, prices for private transactions were unknown to others and hence assessing a “fair” price was accomplished with relatively high informational costs. The market was not very liquid meaning that finding a potential seller/buyer was accomplished with search costs. These factors lead to relatively high transaction costs in general and hampered the efficient exchange of permits and the efficiency of the emissions trading system as such. Since the price is generated at primary auctions or sells (initial permit allocation by authority) and at secondary markets (exchanges over the counter trade), liquidity and transparency within the market is crucial for minimizing transaction costs and facilitating efficient exchange of permits. Allowing intermediaries to be active in permit trading can play a crucial role here. Also markets for machinery and equipment to achieve emissions reductions can be of importance. While in the case of SO2 trading, retrofitting of existing plants to reduce emissions was relatively easy, technical solutions for the reduction of CO2 are more complex because of the non-existence of end-of-pipe technologies for CO 2 emissions. If markets for energy efficient machinery and equipment are sticky, transaction costs can hamper the effective transformation of the economy (Heindl, 2011).
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A policy analysis of the EU Emissions Trading System and its crisis

A policy analysis of the EU Emissions Trading System and its crisis

none of them doubted the effectiveness of the fundamental design of the EU ETS and did not aim to abolish and replace it with another instrument. The policy process of the EU ETS revision was shaped by the then forthcoming UN climate conference in Copenhagen and the oil and gas concerns of the new EU member states of Eastern and Central Europe. As a consequence, the EU ETS Directive became part of a newly implemented climate and energy package. Four other directives were also part of this package and were negotiated in parallel. Moreover, the then forthcoming climate summit in Copenhagen caused a sped up policy process. This meant that the Commission‟s proposal did not have to pass all stages of the co-decision legislative procedure. Furthermore, the European Council participated in the process, something that is very uncommon. On the one hand, this had the positive effect that the revision was highly supported by the heads of the member states. However, on the other hand, the Commission‟s proposal was in a way watered down and the Parliament‟s opportunities to influence the policy making process were weakened. The economic and financial crisis considerably changed the attitudes of the actors. During the time of the negotiations about the climate and energy package, the support for climate policy was very high, something that significantly changed with the crisis. Economic issues became the highest priority on the political agenda and other political issues were delayed. This was also the case for the EU ETS, whose ineffectiveness became clear. The economic crisis had led to an automatic reduction of emissions and thereby an oversupply of allowances and a decline in their prices. Moreover, the crisis resulted in a greater split between the member states of Northern and Western Europe and the member states of Central, Eastern and Southern Europe. Furthermore, the crisis created a feeling of disappointment around environmental politics as the ineffectiveness of the revised EU ETS became visible. Although the economic and financial crisis in the EU can be considered as being caused by neoliberal policies, this did not lead to a turning away. The EU tried to counteract the crisis with further neoliberal instruments. This was also the case when dealing with the problems of the EU ETS, as further neoliberal measures will be added to it.
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Economic and environmental impacts of linking the European Union Emissions Trading System with another emissions trading system / vorgelegt von Peter Kresimir Ladic

Economic and environmental impacts of linking the European Union Emissions Trading System with another emissions trading system / vorgelegt von Peter Kresimir Ladic

The beforementioned changes in prices will naturally bring about some changes in the distribution of income in the economy. Samuelson’s factor price equalization theory suggests that after opening to trade, the relative prices of goods in participating countries should adjust. Same story could be applied to linking emissions trading schemes. The allowance price will increase in one system but decrease in the other. As a result of such price convergence, buyers from an ETS with a higher pre-link permit price and sellers from an ETS with a lower pre-link permit price will be better off, while buyers from a lower pre-link ETS and sellers from a higher pre-link ETS will be worse off (Haites 2016). Furthermore, the change in allowance price will affect the price of energy or price of emissions-intensive goods which will in turn affect households or other non-participating firms that rely on such goods as inputs in their production. Such changes in production costs could also affect these firms’ competitiveness. Consequently, it can be said there will be winners and losers, even though we observe overall cost savings (Jaffe and Stavins 2008), (Flachsland et al. 2009). By using a large-scale computable general equilibrium (CGE) model, Alexeeva and Anger (2016) have analyzed the macroeconomic and trade-based competitiveness impacts of linking the EU ETS with another ETS in four different scenarios, the first (EU scenario) is the no linking scenario and others (EU+, EU++ and EU+++) being only different in how many countries join. The results showed reduced welfare costs from emissions regulation for both EU members and non-EU states, however for non-EU members the gains decrease as more members join (see Table 4). The assessment of international trade effects showed different results. By linking with another ETS, the EU members have improved their terms of trade, while the non-EU members faced a loss in competitiveness, as seen in Table 5. They attribute these results to different roles of EU and non-EU members in the linking agreement, by the EU being permit importers and the rest being permit exporters which is due to different (initial) carbon prices in different regions. Lower permit prices translate to decreased abatement costs and make the production and exports of the EU ETS participants cheaper in relation to imports from non-EU regions.
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Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

Furthermore, some ‘dirty’ firms may have faced such high environmental costs from the EU ETS that they had to exit the market. Similarly, multinational corporations with production units could delocalize their production outside the EU. In the end, only firms who were competitive in a clean environment could have kept their business running. In the aggregate, this would result in a more productive and cleaner business environment. This may explain finding no negative competitiveness effects on firms that have stayed in the market. If firms or subsidiaries exit the market in order to relocate to places where environmental regulation is less restrictive ( ‘pol- lution havens ’), this is called the Pollution Haven Hypothesis (PHH; e.g. see Cole, 2004; Eskeland & Harrison, 2003; Kozluk & Timiliotis, 2016; Millimet & Roy, 2011; Wagner & Timmins, 2008; Yoon & Heshmati, 2017). In the case of the EU ETS, the PHH is supported if signi ficant evidence of carbon leakage attributable to the EU ETS is established. If firms were to start emitting more once relocated, we could observe an increase in total emissions worldwide, making the EU ETS an ine ffective mechanism. No empirical evidence of carbon leakage or firm closures attributable due to the EU ETS has been documented so far. Preliminary results using emissions data by Dechezleprêtre, Gennaioli, Martin, and Muûls (2014) and Wagner et al. (2014) find no supportive evidence for carbon leakage within companies which have non-treated plants during Phase II. Besides emissions, indirect measures of carbon leakage may be used. While short-term leakage is usually detected through increased imports, long-term production relocation may be analysed through outbound foreign direct investments (FDI, see Koch & Basse Mama, 2016). Several trade flow analyses show that the carbon price level did not lead to any signi ficant carbon leakage in the European primary aluminium sector (Sartor, 2012), in the cement and steel sectors (Boutabba & Lardic, 2017; Branger, Quirion, & Chevallier, 2017) or in manufacturing sectors 11 (Naegele & Zaklan, 2017). Focusing on German and Italian multinationals, respect- ively, Koch and Basse Mama (2016) and Borghesi, Franco, and Marin (2016) show that the EU ETS did not lead to relocation through outbound FDI for the average firm. However, both studies reveal that particular sub-groups of enterprises did signi ficantly react to the EU ETS stringency. Still, overall, the scarce evidence so far shows no evidence of carbon leakage for the average firm, and thus contradicts the PHH.
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Multinational corporations and the EU emissions trading system: Asset erosion and creeping deindustrialization?

Multinational corporations and the EU emissions trading system: Asset erosion and creeping deindustrialization?

1. Introduction The EU Emissions Trading System (EU ETS) is the world’s largest carbon market and the EU’s flagship tool to combat climate change. The launch of this transboundary carbon trading system marked a severe tightening of environmental regulation in a uni- lateral way: Starting in the year 2005, EU firms in energy and manufacturing industries faced a strict cap on their total amount of greenhouse gas emissions while the perspec- tive for a widespread implementation of comparable regulations in other regions of the world was uncertain. Even though a number of regional and experimental carbon trad- ing programs were started subsequently to the EU ETS, these regionally or temporally confined initiatives did not alter the unilateral character of the EU ETS in comparison to the substantially lower stringency of climate change policies outside of Europe. Against this backdrop, concerns about potentially negative competitiveness impacts on regulated businesses under the EU ETS were voiced from its inception and have not died out since. The concern that unilateral environmental regulations might impose significant costs, divert resources from productive activities and ultimately put the international com- petitiveness of regulated firms at risk is widespread among economists, policymakers and industry representatives. In case of a persistent international asymmetry in the stringency of environmental regulation, the pollution haven hypothesis is that affected businesses may move production capacity to countries that impose a lighter regulatory burden. In the context of climate change policies, such a shift creates “carbon leakage”, since the emissions would move together with the relocated production. In this scenario, the uni- lateral environmental policy backfires economically and ecologically, combining a loss of economic activity in industrial sectors with, at best, environmental ineffectiveness, or worse, an outright negative effect if production outside of the regulated area is carried out in a more carbon intensive way. Such a process would manifest itself in the form of an erosion of the regulated firms’ asset bases in Europe.
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The Californian Emissions Trading System and Electricity Market

The Californian Emissions Trading System and Electricity Market

► Market Stability Mechanisms: Key determinants of price levels have been and will likely remain the long-term target set by the declining cap and market stability mechanisms. As mentioned in section 2.1.5, prices settling at or near the floor were highly likely from the outset of the program, the impact of complementary policies, and low price-responsiveness of abatement (Borenstein et al., 2019). These factors have elevated the importance of California’s market stability mechanisms in managing volatility and have largely done so successfully, as prices have increased gradually, largely in step with the rising Auction Reserve Price. The effectiveness of California’s complementary policies for key sectors, including renewable portfolio and low-carbon fuel standards, will also continue to play a strong role in the system’s long-run price trajectory. To conclude, the CaT system provides evidences that a price corridor, in particular in conjunction with complementary policies (which decrease the demand for allowances), has a strong tendency to decrease short-term price volatility, as the floor supports prices at the reserve price.
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The European Emissions Trading System (EU ETS): Ex-Post Analysis, the Market Stability Reserve and Options for a Comprehensive Reform

The European Emissions Trading System (EU ETS): Ex-Post Analysis, the Market Stability Reserve and Options for a Comprehensive Reform

national mitigation policies in order to achieve their more ambitious domestic mitigation goals. However, reliance on domestic policy instruments would create an inefficient pattern of regulation across the EU and would add to the factors working towards reducing the EUA price. The EU ETS is embedded in a multi-level governance structure, with Member States having diverging preferences over their technology mix and level of climate policy ambition. The EU ETS is not the only instrument for climate and energy policy, but based on the national sovereignty of the energy mix, Member States can implement additional measures, such as renewable support schemes, energy efficiency measures, or additional domestic carbon prices (UK) that interact with the EU ETS. This is likely to intensify asymmetries in marginal abatement costs across Member States and thus increase overall policy cost. In addition, these policies also do only reallocate but not on net reduce emissions and can add to an even stronger reduction of the EUA price by exogenously reducing the allowance demand through channels identified in section 2.2, thus intensifying the problems of the EU ETS. At the same time, given the differences in envisaged levels and timing of climate policy targets across Member States, the question arises as to whether the EU ETS can be adjusted to help guide these divergent national preferences towards mutually beneficial outcomes. These points are revisited in the discussion of reform options in the next sections.
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Reforming the EU Emissions Trading System: An Alternative to the Market Stability Reserve

Reforming the EU Emissions Trading System: An Alternative to the Market Stability Reserve

instead purchase allowances. In the past years, the allow- ance price ranged between €6 and €9. This relatively low price is mainly attributed to a huge surplus of allowances in the market. A surplus emerges if the cumulated number of allowances exceeds the (verifi ed) actual emissions. There are manifold reasons for the huge surplus of excess allowances. One reason is the unexpected low emission levels as a consequence of the longstanding and se- vere economic crisis that erupted in 2008. Most notably, Southern European countries have been strongly affl icted by the crisis and have not yet recovered economically. Another reason is the generation of green electricity in Europe. Both the Commission and individual member states defi ned targets for the shares of green electricity in consumption and established promotion schemes that overlap with the ETS. In Germany, for instance, the gen- eration of CO 2 -free electricity, which is promoted by fi xed feed-in-tariffs for renewable energy sources (RES), leads to a decreased demand for emission allowances in the German power sector. This is illustrated in Figure 2 by a shift of the demand curve from D 0 to D 1 .
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The right way to reform the EU emissions trading system: Alternatives to the market stability reserve

The right way to reform the EU emissions trading system: Alternatives to the market stability reserve

Alternatives to the Market Stability Reserve RWI Position #65, May 28, 2015 Summary In the light of persistently low prices for allowances, there is much debate about refor- ming the EU emissions trading system. Based on a proposal of the European Commission, the EU plans to introduce the so called Market Stability Reserve in 2019: a mechanism that regulates the amount of allowances within the market by temporarily taking some of the allowances into a reserve. The Commission thereby aims at reducing the surplus and securing a higher market price for allowances. An alternative reform proposal is the introduction of a minimum price. This RWI position puts forward a third alternative: retaining the emissions trading system in its original form and reducing the surplus by a one-time adjustment. In 2014, 900 million allowances from the years 2014 to 2016 were back-loaded to be auctioned in the years 2019 and 2020. Instead, these allowances should be deleted. Furthermore, if necessary, the amount of allowances could be constantly decreased by reducing the cap more strongly than planned. Compared with the other reform options, retaining the emissions trading system in its original form has two major advantages: first, politically driven interventions are minimized and, second, free market prices exhibit a stabilizing effect for fluctuations caused by the business cycle.
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Linking CO 2-emissions from international shipping to the EU emissions trading scheme

Linking CO 2-emissions from international shipping to the EU emissions trading scheme

Non-participating countries may think it is unfair of the EU to unilaterally enforce an emission cap that affects their trade. However, other Annex 1 countries have little reason to complain as they have been asked by the UNFCCC to take action together with the IMO. It is their inaction that is forcing the EU to establish a regional scheme. Non-Annex 1 countries may have better grounds for complaining. However, one should in this respect remember that the ships covered by the scheme are in most cases involved in dedicated trade between non-Annex 1 countries and Member States of the EU, and those ships cause as much pollution on their return voyage as on their trips to Europe. It is also important in this context to recall that in 2004, the eight largest Chinese ports accounted for over a quarter of the world’s container traffic (ISL, 2005). This trade is a result of commercial deals which result in both consumer and producer surpluses. Finally, one should note that it is proposed that the majority of the proceeds from the scheme be recycled to the industry on the basis of GT kilometres sailed. Therefore the net burden for the average ship will be small, although high-emitting ships will, of course, have to pay considerably more than they receive back.
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Uncertainty and Speculators in an Auction for Emissions Permits

Uncertainty and Speculators in an Auction for Emissions Permits

Second, I model the auction as a strategic market. It has been established both theoretically and empirically that uniform-price auctions create incentives for demand reduction, even if the number of bidders is large. For instance, Milgrom (2004, p. 262) argues that even when the bidders are small relative to the market, there can be equilibria in which prices settle far below the competitive price. This result has been firstly pointed out by Wilson (1979) who showed that the uniform price auction can have equilibria which result in significant reduction of the revenue to the auctioneer, regardless of the number of bidders or their attitude towards risk. Moreover, Ausubel et al. (2014) emphasize that when bidder’s marginal utility is decreasing, the seller will not be able to extract the whole surplus, even when the number of bidders approaches infinity. Finally, evidence of demand reduction in uniform-price auctions is also present in experimental studies (Ausubel et al. 2014, Burtraw et al. 2009). Therefore, my model accounts for demand- reduction incentives, which, in fact, ensures the generality of the equilibrium, as one can always recover the competitive equilibrium by letting the number of bidders grow large. It is, thus, clear from the outset that the differential demand reductions stemming from bidders asymmetries will lead to inefficient allocations in the auction.
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