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Erschienen in: Zeitschrift für Energiewirtschaft 3/2023

01.10.2023 | Forschung | Regulierung

Fit for 55? An assessment of the effectiveness of the EU COM's reform proposal for the EU ETS

verfasst von: Theresa Wildgrube

Erschienen in: Zeitschrift für Energiewirtschaft | Ausgabe 3/2023

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Since its establishment in 2005, the European Emissions Trading System (EU ETS) 1 has been reformed multiple times, changing its underlying incentive structure. The reformed and strengthened EU ETS currently reaches price levels of about 87 Euro per EU allowance (EUA) in May 2023, compared to an average of 24.9 Euro in 2020 and 5.8 Euro in 2017. While other factors may influence EUA prices, the EU ETS experienced a significant price increase after its 2018 reform. Similarly, the EUA price levels increased from 25.5 Euro in May to 61.3 Euro in September 2021 after the European Commission (EU COM) announced its 'Fit for 55' legislative package in July 2021 (ICE 2023). The package proposes measures to achieve the increased EU climate targets to at least 55% reduction until 2030 compared to 1990 levels and climate neutrality until 2050 set in the European Climate Law (European Parliament and the Council of the European Union 2021). The 'Fit for 55' package contains a substantive reform proposal for the EU ETS with three key reform elements that aim at strengthening the existing EU ETS: an increase of the linear reduction factor (LRF), an adjustment of the intake rules of the Market Stability Reserve (MSR) and an adjustment of the threshold for the Cancellation Mechanism (CM) (European Commission 2021e). …

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Fußnoten
1
This article uses the following abbreviations: EU ETS: European Emissions Trading System; EUA: EU allowance; EU COM: European Commission; LRF: linear reduction factor; MSR: Market Stability Reserve; CM: Cancellation Mechanism; TNAC: total number of allowances in circulation.
 
2
In addition to the outlined adjustments, the EU COM proposes an extension of the EU ETS to the maritime and aviation sectors into the main EU ETS (European Commission 2021e). While both sectors only have a limited amount of emissions (the aviation and maritime caps are approx. 24 and resp. 79 million allowances (European Commission (2020) and European Commission (2021e)), the complex provisions for their integration into the EU ETS would impact the market outcome in hard to disentangle ways. For the purpose of clearly decomposing the individual effects of the three reform amendments outlined above, the research refrains from including these provisions.
 
3
The EU adopted the reform in April 2023. The adjustments to the MSR and the CM were adopted as proposed by the EU COM. The final LRF is 4.3% from 2024 to 2027 and 4.4% from 2028 (instead of 4.2%) with cap rebasings of 90 million in 2024 and 27 million in 2026 (instead of a single reduction of 117 million allowances in 2024)(European Parliament and the Council of the European Union 2023). The adopted reform is hence slightly more ambitious that the initial proposal discussed in the article at hand.
 
4
In fact, the proposed LRF slightly overachieves the target leading to a emissions reduction of 62% compared to 2005 levels.
 
5
European Commission (2021e) leaves the exact value for the one-off reduction option to the year the proposal enters into force but European Commission (2021c) states a reduction of 117 allowances. This, in turn, indicates a target year 2024 for the proposal to enter into force with 39 million allowances for every year from 2021 to 2023 in which the increased LRF is not applied.
 
6
To simplify the notation, the research assumes identical firms. This is has no effect on the results as the numerical model uses an aggregate marginal abatement cost function. See for instance Perino and Willner (2016) for a similar model with heterogeneous firms.
 
7
The threshold for MSR intake 𝓁 zoneis 833 million and the upper threshold 𝓁 upunder the reform proposal is 1096 million allowances. The intake share γ(t )is 24% until 2023 and 12% afterwards under the regulation in place. The EU COM proposes maintaining γ(t) at a level of 24% until 2030. The reinjection is triggered at a lower threshold 𝓁 low of 400 million allowances and comes at yearly tranches Rof 100 million allowances (European Parliament and the Council of the European Union (2015) and European Commission (2021d)).
 
8
In reality, MSR intake is determined for a period from September of one year to August of the next year. However, MSR volume for the cancellation mechanism is the end value of each year. To adjust this MSR intake to a yearly basis, the model uses for 2021 the January to August 2021 value from 2020's Communication C(2020) 2835 adjusted by Notice 2020/C 428 I/01 plus an estimate for MSR intake from 2021's Communication C(2021)3266. The estimate uses the 2020 share of the September to December intake from the 2020's Communication total intake.
 
9
At an intake rate of 24% under the regulation in place, in contrast, the proposed transition zones leads in all cases to a lower intake.
 
10
This explains the spike in the price difference as the reinjection allows for a longer maintenance of a Hotelling price path in New MSR.
 
11
More generally speaking, economic crises can take different shapes of recovery. See Bocklet (2020) for an analysis of different types in the context of the EU ETS..
 
Metadaten
Titel
Fit for 55? An assessment of the effectiveness of the EU COM's reform proposal for the EU ETS
verfasst von
Theresa Wildgrube
Publikationsdatum
01.10.2023
Verlag
Springer Fachmedien Wiesbaden
Erschienen in
Zeitschrift für Energiewirtschaft / Ausgabe 3/2023
Print ISSN: 0343-5377
Elektronische ISSN: 1866-2765
DOI
https://doi.org/10.1007/s12398-023-0931-3

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