Abstract
The stringency of the EU's Emission Trading System (ETS) is bound to be ratcheted-up to deliver on more ambitious goals as formulated in the EU's Green Deal. Tightening the cap needs to consider the interactions with the Market Stability Reserve (MSR), which will be reviewed in 2021. We analyse these issues using the model LIMES-EU. First, we examine how revising MSR parameters impacts allowance cancellations. We find that varying key design parameters leads to cancellations in the range of 2.6–7.9 Gt – compared to 5.1 Gt under current regulation. Overall, the bank thresholds, which define when there is intake to/outtake from the MSR, have the highest impact. Intake rates above 12% only have a limited effect, and cause oscillatory intake behaviour. Second, we analyse how more ambitious climate 2030 targets can be achieved by adjusting the linear reduction factor (LRF). We find that the LRF increases MSR cancellations substantially up to 10.0 Gt. This implies that increasing its value from currently 2.2% to only 2.6% could be consistent with an EU-wide target of −55% by 2030. However, MSR cancellations are subject to large uncertainty, which increases the complexity of the market and induces high price uncertainty.
Highlights
Being reformed only recently, the Emission Trading System (ETS) of the European Union (EU) is yet again bound for another major reform
The purpose of this paper is twofold: (i) to analyse which Market Stability Reserve (MSR) parameters have a significant effect on the cap size by affecting MSR cancellations; (ii) to show which linear reduction factor (LRF2) would achieve a given 2030 emission targets when considering the interaction with the MSR
The EU ETS and its recent reforms we shortly present the policy background, review previous work that has analysed the effects of the MSR and provide an overview about cancellation estimates
Summary
The Emission Trading System (ETS) of the European Union (EU) is yet again bound for another major reform. The MSR started operating in 2019 and is a mechanism that reduces the total number of allowances in circulation (TNAC1) and cancels allowances based on a complex mechanism As such it affects the overall cap and should be considered when increasing the stringency of the EU ETS. The purpose of this paper is twofold: (i) to analyse which MSR parameters have a significant effect on the cap size by affecting MSR cancellations; (ii) to show which linear reduction factor (LRF2) would achieve a given 2030 emission targets when considering the interaction with the MSR This is of importance for the MSR review in 2021 and in particular for reforming the EU ETS towards higher stringency. In combination with our assumed MAC curve for the industry our implied total MAC curve is much flatter and we find significantly fewer cancellations despite assuming a discount rate of only 5%
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have