By Simon Quemin and Raphaël Trotignon
A policy package defining the operating rules of the European carbon market until 2030 has just been adopted. Based on a revised version of the ZEPHYR model, this Policy Brief provides an impact assessment of the reform on permit price and emission reduction paths. Four main messages emerge:
- The coexistence of low carbon price levels and a large amount of unused permits can be explained by an unanticipated decrease in permit demand between 2008 and 2017 that is attributable to both the economic slowdown and the achievements of complementary policies aimed at encouraging the deployment of renewables and, to a lesser extent, promoting energy efficiency. On the supply side, this is also due to the rapid and massive use of the maximum number of Kyoto credits allowed.
- In addition to the increase in the annual cap reduction rate (linear reduction factor), the market stability reserve induces an additional decrease in permit supply over the period 2018-2030 (between 2.8 and 3.7 billion). In turn, this implies a sharp rise in the permit price (on average €25 and €38 per tCO2 in 2020 and 2030 as opposed to €9 and €13 per tCO2 respectively absent the reform). This price increase will be more pronounced if liable firms anticipate the impacts of the reform from the start in comparison with the situation where they gradually adjust their anticipations over time.
- The implementation of the reform should induce a decrease in emissions from the covered perimeter in the order of 50% in 2030 relative to 2005. This is above the previously agreed upon objectives, which suggests that there is potential for reassessing Europe’s climate ambition at relatively modest cost.
- According to the European authorities, one of the virtues ascribed to the stability reserve should be to make the EU ETS more resilient to external shocks such as those that have affected the market since 2008. Our modelling, however, suggests that the MSR’s responsiveness and dampening capacity would be limited.