Association Webinars: Strengthening the EU Emission Trading System: Its Impact, Unintended Consequences & Overlapping Policies



  

Slides: View Kenneth Bruninx's slides.

To provide a strong price signal for greenhouse gas emissions abatement, Europe decided to strengthen the European Union Emissions Trading System (EU ETS) by implementing a market stability reserve (MSR) that includes a cancellation policy and to increase the rate at which the emissions cap decreases. In this talk, we show via a detailed long-term planning model that this strengthened EU ETS may quadruple EUA prices and may decrease cumulative CO2 emissions with 21.3 GtCO2 compared to the cumulative cap before the strengthening (52.2 GtCO2). Around 40% of this decrease (8.3 GtCO2) is due to the more stringent emissions cap and 60% due to the cancellation policy (13 GtCO2). Our analysis reveals that the impact of the MSR is, however, strongly dependent on other policies (e.g., renewable energy targets, nuclear, lignite and coal phase-outs) and cost evolutions of abatement options (e.g., investment cost reductions for wind and solar power). We discuss how the design of the market stability reserve greatly increases uncertainty over cumulative emissions. Moreover, we reveal how the current design of the MSR implies that there will be more cancellation when future abatement is more costly, making the policy more stringent when the cost of compliance is higher. This may lead to paradoxical effects on cumulative emissions when overlapping policies are in place. Last, we briefly discuss the impact of the COVID-19 pandemic on the functioning of EU ETS and the MSR. We illustrate that if one reduces the impact of an event such as the COVID-19 pandemic to the emission allowance demand shock as such, i.e., ignoring the short-term downward price effect, one may overestimate the ability of the market stability reserve to absorb these shocks.

The webinar provides a high-level summary of the following papers:

[1] K. Bruninx, M. Ovaere, and E. Delarue. ‘‘The Long-Term Impact of the Market Stability Reserve on the EU Emission Trading System’’ Energy Economics, June 2020. 

[2] K. Bruninx, M. Ovaere, K. Gillingham, and E. Delarue. ‘‘The unintended consequences of the EU ETS cancellation policy’’, 2019. KU Leuven Energy Institute Working Paper WP EN2019-11. Available online: https://www.mech.kuleuven.be/en/tme/research/energy_environment/Pdf/wp-en2019-11

[3] K. Bruninx & M. Ovaere, ‘‘Estimating the impact of COVID-19 on emissions and emission allowance prices under EU ETS’’, IAEE Energy Forum / Covid-19 Issue, 2020.

Speaker:

Kenneth Bruninx received the M.Sc. degree in Energy Engineering in 2011, the M.Sc. in Management in 2015 and the Ph.D. degree in Mechanical Engineering in 2016, all from the Univeristy of Leuven (KU Leuven), Belgium. Currently, he is working as a post-doctoral research fellow of the Research Foundation - Flanders (FWO) in the Energy Systems Integration and Modeling Group at the University of Leuven and EnergyVille.

 

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