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

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). …