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Journal Article

How to avoid history repeating itself: the case for an EU Emissions Trading System (EU ETS) price floor revisited

Authors

Flachsland,  Christian
External Organizations;

/persons/resource/Michael.Pahle

Pahle,  Michael
Potsdam Institute for Climate Impact Research;

Burtraw,  D.
External Organizations;

/persons/resource/Ottmar.Edenhofer

Edenhofer,  Ottmar
Potsdam Institute for Climate Impact Research;

Elkerbout,  M.
External Organizations;

Fischer,  C.
External Organizations;

/persons/resource/Oliver.Tietjen

Tietjen,  Oliver
Potsdam Institute for Climate Impact Research;

Zetterberg,  L.
External Organizations;

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Citation

Flachsland, C., Pahle, M., Burtraw, D., Edenhofer, O., Elkerbout, M., Fischer, C., Tietjen, O., Zetterberg, L. (2020): How to avoid history repeating itself: the case for an EU Emissions Trading System (EU ETS) price floor revisited. - Climate Policy, 20, 1, 133-142.
https://doi.org/10.1080/14693062.2019.1682494


Cite as: https://publications.pik-potsdam.de/pubman/item/item_23399
Abstract
Several years of very low allowance prices in the EU emissions trading scheme (ETS) have motivated calls to introduce a price floor to correct potential underlying distortions and design flaws, including (i) the political nature of allowance supply and related credibility issues, (ii) potential myopia of market participants and firms, and (iii) waterbed and rebound effects resulting from policy interactions. In the wake of the recent EU ETS reform, allowance prices have sharply increased. This raises the question of whether the case for introducing a price floor in the EU ETS remains valid. We argue that such a price floor, also adopted in several other greenhouse gas cap-and-trade systems worldwide, remains an important improvement in the design of the system, as long as the above-mentioned distortions and design flaws persist. An EU ETS price floor can safeguard against these issues and provides more explicit guidance on the minimum allowance price policymakers consider acceptable. Either as a complement or substitute to the current Market Stability Reserve (MSR), a price floor would thus make the EU ETS less prone to future revision in case of unexpectedly low prices. We identify and confront four prominent arguments against the introduction of an EU ETS price floor.