A minimum price for emission allowances offers the best opportunity for the EU Emissions Trading System (ETS) to function as a key policy instrument in reducing CO2 emissions. Such a price floor will create a steady and higher CO2 price, which will stimulate corporations to reduce their CO2 emission and invest in low-carbon technologies. When the price of CO2 is too low, it is often more efficient for companies to buy emission rights rather than to invest in emission reduction.
Discussion on the functioning of the EU Emissions Trading System
The EU Emissions Trading System (EU ETS) is a key instrument of EU climate policy, providing a clear reduction pathway for CO2 emissions. The current carbon price (of about 3 euros per tonne of CO2, April 2013) is much lower than previously expected (which was around 30 euros) and is likely to remain low for a long time. This fuels doubts about whether the ETS will remain a key policy instrument in the long term. Such doubts also increase investment uncertainty, which is likely to have a negative impact on further investments in low-carbon technologies needed for a low-carbon economy in 2050.
Multiple options available to improve the EU ETS
In November 2012, the European Commission put forward six options for a more structural reform of the EU ETS. The proposed options vary from reducing the cap and expanding the ETS to include other sectors, to strengthening the ETS by measures directly affecting allowance prices. The Dutch Ministry of Infrastructure and the Environment (IenM) asked the PBL Netherlands Environmental Assessment Agency to assess the impact of these options. Four categories of options for reforming the ETS were evaluated:
- reducing the supply of emission allowances;
- expanding the ETS by including other sectors;
- a minimum price for auctioned allowances;
- combining ETS with a carbon tax.
Recently, the European Parliament voted against the European Commission's proposal to temporarily set aside emission allowances. In an earlier assessment of this proposal, PBL concluded that the impact of this backloading proposal on CO2 prices is likely to be limited, because the total amount of allowances up to 2020 would remain unchanged.
A minimum price on carbon offers the best opppertunities for a robust system
All options analysed would reduce emissions and cause the emission price to increase. A minimum price on carbon, however, would provide the best opportunity to make the ETS more robust against unforeseen events, such as a further deterioration of the economy. Such a minimum price would result in more emission reductions if abatement proves to be cheaper than expected. Moreover, it would provide a more predictable price path, which is particularly helpful for companies investing in low-carbon technologies. Other cap-and-trade systems in the world, such as in California and Australia, also have a minimum price in place.