Causes of the EU ETS price drop: Recession, CDM, renewable policies or a bit of everything?—New evidence

Abstract

The price of EU allowances (EUAs) in the EU Emissions Trading Scheme (EU ETS) fell from almost 30€/tCO2 in mid-2008 to less than 5€/tCO2 in mid-2013. The sharp and persistent price decline has sparked intense debates both in academia and among policy-makers about the decisive allowance price drivers. In this paper we examine whether and to what extent the EUA price drop can be justified by three commonly identified explanatory factors: the economic recession, renewable policies and the use of international credits. Capitalizing on marginal abatement cost theory and a broadly extended data set, we find that only variations in economic activity and the growth of wind and solar electricity production are robustly explaining EUA price dynamics. Contrary to simulation-based analyses, our results point to moderate interaction effects between the overlapping EU ETS and renewable policies. The bottom line, however, is that 90% of the variations of EUA price changes remains unexplained by the abatement-related fundamentals. Together, our findings do not support the widely-held view that negative demand shocks are the main cause of the weak carbon price signal. In view of the new evidence, we evaluate the EU ETS reform options which are currently discussed.

Influences from the European Parliament on EU emissions prices

“…This is one example where legislation passed by the European Parliament (EP), which holds legislative authority over the EU ETS, impacted on EUA prices. Prior research supports a wider argument that EUA prices are 1 European Commission Press Release accessed on 9th June 2015 at http://europa.eu/rapid/press-release_MEMO-13-343_en.htm in uenced by regulatory actions (Daskalakis et al, 2009;Koch et al, 2014;Kossoy and Guigon, 2012). Missing from prior studies though is a systematic investigation of the overall impact of emissions market speci c and related legislation and resolutions passed by the EP, thus leaving a number of open questions.…”

“…In April 2013 the European Parliament was expected to pass a European Commission legislative proposal to x the recognized oversupply issue in the EU Emissions Trading Scheme (EU ETS) (Koch et al, 2014). The Commission's proposal 1 involved postponing until 2019-2020 the release of 900 million EU emissions allowances (EUAs) -each allowance granting permission to a regulated installation to emit one tonne of CO 2 equivalent -that were originally due to be released into the market in 2013-15.…”

“…In a further contribution, extending work done independently by Koch et al (2014), we examine the potential conditional determinants of market reaction to EP legislation. In particular we develop innovative measures of market sentiment and market attention, which are known in other markets to in uence reaction to new information.…”

Carbon pricing in the EU: Evaluation of different EU ETS reform options

“…As can be seen in Table 1, total initial allocation of allowances in phase II increased over time. Since the demand for allowances was lower than expected and decreased over time (largely due to the 'Great Recession' that started in 2008), downward pressure on the EUA price occurred (Koch et al, 2014). Second, other policy measures interact with the EU ETS.…”

A Proximate Mirror: Greenhouse Gas Rules and Strategic Behavior Under the US Clean Air Act

“…For example, in the European Union, renewable policies have contributed to low prices in the emissions trading system, encouraging the adoption of more stringent emissions targets (Koch et al 2014). In the United States, the stringency of the CPP is based on findings about the technical feasibility of reducing carbon emissions, drawing on the variety of technology policies already in place in the states.…”