Ratcheting Up Carbon Trade: The Politics of Reforming EU Emissions Trading

Abstract

The EU’s emissions trading system (ETS) covers almost half of its greenhouse gas emissions and has been hailed as the cornerstone and flagship of EU climate policy. In spring 2013, however, the ETS was in severe crisis, with a huge surplus of allowances and a sagging carbon price. Even a formally simple measure to change the timing of auctioning was initially rejected by the European Parliament. Two years later, a much more important, quantity-focused “market thermostat” (the market stability reserve) was adopted, and proposals for a complete ETS overhaul were put on the table. This article examines how it was possible to turn the flagship around so quickly, providing insights into the mechanisms for gradually rendering emissions trading systems more effective. Crucial changes at the EU and national levels are identified, chief among them changes in Germany and in the European Parliament. Furthermore, the quantity-based tightening mechanism discussed could be of relevance for carbon markets outside Europe.

Tracking banking in the Western Climate Initiative cap-and-trade program

“…While a full discussion of overallocation and any potential remedies is beyond the scope of this analysis, we note that policymakers have several options to achieve additional emission reductions using the capand-trade program. Potential reforms include reducing the future supply of compliance instruments on a onetime basis; reducing the future supply of compliance instruments using a rule-based adjustment that applies only if observed banking metrics exceed (or market prices fall short of) certain pre-determined levels, as is done for the EU ETS and RGGI programs, respectively [15,32,33]; and increasing the program's minimum floor price to drive additional greenhouse gas reductions in the presence of overallocation conditions. Tracking key program outcomes (MMtCO 2 e).…”

“…State policymakers have since called for additional reporting metrics to track observed banking behavior in order to evaluate concerns related to overallocation, as is done with other prominent cap-and-trade programs-including the northeastern US states' RGGI program [32], the European Union ETS [33], and even CARB's own Low Carbon Fuel Standard [34]. In October 2018, the Independent Emissions Market Advisory Committee (IEMAC)-an advisory body created by AB 398 that reports to both CARB and the California Legislature, on which one of us serves-concluded that current program reporting is insufficient and recommended CARB adopt metrics for tracking banking on an annual and multi-year compliance period basis [15].…”

Understanding coherence between policy spheres

“…The existing literature tends to focus on the shortcomings of single climate policy measures (such as the emission trading scheme or renewable energy policy in particular) in contributing to climate change mitigation goals, safeguarding the internal energy market and decoupling environmental protection from economic performance (e.g., Flues, Löschel, Lutz, & Schenker, 2014;Gawel, Strunz, & Lehmann, 2014;Helm, 2014;Jevnaker & Wettestad, 2017). The existing literature tends to focus on the shortcomings of single climate policy measures (such as the emission trading scheme or renewable energy policy in particular) in contributing to climate change mitigation goals, safeguarding the internal energy market and decoupling environmental protection from economic performance (e.g., Flues, Löschel, Lutz, & Schenker, 2014;Gawel, Strunz, & Lehmann, 2014;Helm, 2014;Jevnaker & Wettestad, 2017).…”

“…However, despite rising academic interest in the link between energy and climate policies, we still have limited cumulative knowledge on these political dynamics. The existing literature tends to focus on the shortcomings of single climate policy measures (such as the emission trading scheme or renewable energy policy in particular) in contributing to climate change mitigation goals, safeguarding the internal energy market and decoupling environmental protection from economic performance (e.g., Flues, Löschel, Lutz, & Schenker, 2014;Gawel, Strunz, & Lehmann, 2014;Helm, 2014;Jevnaker & Wettestad, 2017). What is missing is systematic and comparative research on the conditions of policy coherence.…”

Disaggregating the dependent variable in policy feedback research: an analysis of the EU Emissions Trading System

“…The EU ETS is the world's largest greenhouse gas emissions trading system (Point Carbon 2018, p. 3) and has a long policy history, dating back to the late 1990s. During that time, it has undergone a near-continuous process of policy change: since 2003, six major reforms have been adopted (Jevnaker and Wettestad 2017;Skjaerseth and Wettestad 2010). The ETS is a highly complex instrument that creates uneven benefits and costs for a wide range of actors.…”