Reform of the European Union Emissions Trading System

Dr Luca Taschini and his colleagues at the ESRC Centre for Climate Change Economics and Policy have been studying carbon markets associated with ‘cap-and-trade’ systems around the world.

The first major, and largest, ‘cap-and-trade’ system was launched by the European Union in 2005. Although the European Union Emissions Trading System (EU ETS) has successfully helped Member States to reduce their emissions of greenhouse gases, the price of carbon has been much lower than expected, partly due to the distribution of too many free emissions permits and partly because emissions declined sharply as a result of the global economic slowdown after the financial crisis that started in 2008.

The low carbon price level is feared to be too low to stimulate investments by companies in new technologies to reduce greenhouse gas emissions, and policy-makers across the Member States have been discussing how the EU ETS might be reformed so that it functions more effectively.

Dr Taschini has produced a number of research papers about the EU ETS, and has been engaging with policy-makers, businesses and other researchers to explore how best to reform it.

In February 2013, Dr Taschini submitted a response to a consultation by the European Commission on structural options to strengthen the EU ETS. He outlined a long-term solution to the over-supply of emissions permits within the EU ETS through a rule-based reserve management mechanism. The paper was promoted to the media and distributed to the Centre’s network of key decision-makers.

Following meetings with the European Commission, companies, national government departments and other organisations, Dr Taschini carried out further analysis to investigate potential design options for the -based reserve management mechanism for the EU ETS.

He submitted his proposal to the European Commission in November 2013. He also presented it at the 2013 Dahrendorf Symposium in Berlin to an audience of leading academics, policy-makers and business representatives.

Following comments received from the Commission and experts at the Dahrendorf Symposium, Dr Taschini updated his proposal and published it in a policy paper.

In January 2014, the European Commission published plans for a ‘Market Stability Reserve’. The design of the reserve is much like the rule-based reserve management mechanism proposed by Dr Taschini.

Dr Taschini and his colleagues have developed a model to analyse the quantity thresholds for the proposed Market Stability Reserve, and have been working with the UK Government’s Department of Energy and Climate Change to test the thresholds under a range of assumptions.

Dr Taschini has also presented his work at workshops hosted by the European Parliament Committee on the Environment, Public Health and Food Safety, and the Centre for European Policy Studies. He and his colleagues submitted written evidence and provided expert testimony to the inquiry by the House of Commons Select committee on Energy and Climate Change Committee on linking emissions trading systems.

Dr Taschini has also been communicating about his work through the media, including interviews with the ‘Financial Times’ and ‘Business Green’.