Report

Five Myths About a European Union Emissions Trading System Carbon Price Floor

Oct 17, 2018 | Christian Flachsland, Michael Pahle, Dallas Burtraw, Ottmar Edenhofer, Milan Elkerbout, Carolyn Fischer, Oliver Tietjen, Lars Zetterberg

Summary

This paper summarizes and confronts five popular arguments against introducing an EU ETS carbon price floor.

Key Findings

  • The recent EU ETS reform adds several institutional innovations but does not remedy the persistent risk of future downward price shocks.
  • Even despite the recent increase in EU ETS allowance prices, a carbon price floor remains an important institutional reform option to enhance low-carbon investor confidence.
  • Popular arguments against an EU ETS price floor can be rejected.
  • There are several entry points for introducing an EU ETS carbon price floor in the EU policy process in the upcoming years.

Overview

This policy brief builds on the workshop EU ETS Reform: Taking Stock and Examining Carbon Price Floor Options, held at the Centre for European Policy Studies (CEPS) in Brussels on July 3, 2018. The workshop was cosponsored by CEPS and the AHEAD and Mistra Carbon Exit projects. While the brief draws on insights from workshop discussions, its views are solely those of the authors.

The brief outlines different perspectives on the past performance of the European Union Emissions Trading System (EU ETS) in terms of its allowance price (Section 1), analyzes how the recent reform responded to related challenges (Section 2), and considers the case for introducing a carbon price floor in the EU ETS (Section 3). The main part of the brief (Section 4) identifies five myths in the debate of an EU ETS price floor and critically confronts them. Section 5 concludes by discussing potential entry points for introducing a carbon price floor in the context of the upcoming EU climate policy process.