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Abstract

The EU is currently preparing a major overhaul of its climate policy framework to deliver on the Green Deal’s new climate targets of a 55 percent cut in greenhouse gas (GHG) emis-sions relative to 1990 by 2030 and GHG neutrality by 2050. Ex-tending and strengthening the role of carbon pricing, imple-mented through the EU Emissions Trading System (EU-ETS), will play an important role in this framework. Accordingly, the design and governance of the EU-ETS will be ever more crucial. In this article, we focus both on the 2018 EU-ETS re-form as the first step on a slippery slope of increasing dis-cretionary intervention and on the upcoming reform risks reinforcing this trend. In their seminal work, Kydland and Prescott (1977) caution against such interventions, because of their ability to destabilize the market and engender recur-ring interventions. This limits the capacity of policymakers to credibly commit to long-term targets, which undermines the dynamic efficiency of intertemporal emissions trading sys-tems like the EU-ETS. To counteract this trend, we provide recommendations for rule-based adjustments to the EU-ETS.