New mechanism proposed to reform the European Union Emissions Trading System

Posted on 22 Jan 2014 in

“The European Commission should reform the European Union Emissions Trading System by introducing new rules to automatically withdraw allowances when the carbon price starts to fall too rapidly, according to a policy paper published today (22 January 2014) by the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Economics and Policy at London School of Economics and Political Science.

“A new mechanism proposed by Dr Luca Taschini and his co-authors would prevent a sustained collapse in the carbon price in the future, and would encourage companies to anticipate the automatic withdrawal or injection of allowances.

“The Commission has been considering options for reform of the Emissions Trading System after the price of carbon dropped from over €30 in 2008 to less than €5 this year. One of the main reasons for the collapse in the carbon price was the economic downturn which caused a drop in the demand for emissions allowances.

“Members of the European Parliament have voted to temporarily withdraw 900 million allowances from the Emissions Trading System in an effort to boost their price.

“However, Dr Taschini and his co-authors analysed the likely impact of the temporary withdrawal and found that, because the allowances are due to be re-introduced again at some point before 2020, it is unlikely to result in a sustained higher price for carbon.

“The paper warns that “one-off measures treat the symptom of the problem – weak price – rather than the cause – a lack of system responsiveness”.

“It also concludes that permanently removing the allowances would not prevent the possibility of future price crashes.

“Instead Dr Taschini and his co-authors recommend the creation of a new mechanism which would automatically operate whenever the carbon price starts to fall too quickly, leading to a withdrawal of allowances.

“The size of the withdrawal would depend on a number of factors, including the number of allowances that are still available to be auctioned.

“Similarly, the proposed mechanism would also lead to an injection of allowances into the Emissions Trading System whenever the carbon price rises too rapidly.

“Dr Taschini and his co-authors point out that companies would also adjust their own behaviour in anticipation of the withdrawal by banking their allowances, which would reduce the supply within the Emissions Trading System and causing a rise in the carbon price.

“The paper states: “This behaviour is likely to mean that the mechanism will trigger only when there are significant and unforeseen price shocks.”

“Dr Taschini and his co-authors highlight the fact that the European Union Emissions Trading Directive allows for the European Commission to increase the number of allowances available to companies if the carbon price rises too quickly, but does not allow for a withdrawal when the price collapses.

“The proposed new mechanism was designed after a discussion at the Dahrendorf Symposium, which was held in Berlin on 14 and 15 November 2013.”

Notes for Editors

  1. The ESRC Centre for Climate Change Economics and Policy (https://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (http://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.
  2. The Grantham Research Institute on Climate Change and the Environment (http://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (http://www.granthamfoundation.org/).
  3. The 2013 Dahrendorf Symposium on ‘Changing the European Debate: Focus on Climate Change’ took place at the Akademie der Künste, Pariser Platz, Berlin, on 14 and 15 November 2013. The symposium is an initiative of the Hertie School of Governance, the London School of Economics and Political Science and Stiftung Mercator. Its objective is to shine a light on how academia can have a productive influence on socio-political discourse and aims to offer European perspectives on the most pressing global challenges of our time. Further details about the symposium can be found at: http://www.dahrendorf-symposium.eu/