Five Myths About a European Union Emissions Trading System Carbon Price Floor
This paper summarizes and confronts five popular arguments against introducing an EU ETS carbon price floor.
- 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.
This report 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.
Darius Gaskins Senior Fellow
Dallas Burtraw is the Darius Gaskins Senior Fellow at RFF. Burtraw’s research includes analysis of the distributional and regional consequences of climate policy and the evolution of electricity markets, including renewables integration.
Nonresident Senior Fellow
Carolyn Fischer is a senior fellow at RFF. Fischer's research explores questions of environmental policy instrument design.
On the Issues — Nov 10, 2023
On the Issues: Renewable Energy Headwinds, Electric Grid Upgrades, and More
A biweekly newsletter connecting global current events, pressing climate and energy policy news, and economics research from RFF scholars. This week: Renewable Energy Headwinds, Electric Grid Upgrades, and More.
Common Resources — Nov 9, 2023
Adding an Emissions Cap to the Inflation Reduction Act Would Help Meet US Climate Goals
Implementing a federal cap-and-trade policy would complement the Inflation Reduction Act. Together, these two policies could reduce air pollution and retail electricity prices and ensure that the United States meets its national climate goals for 2030.
Resources Magazine — Oct 4, 2023
California’s Cap-and-Trade Program and Improvements in Local Air Quality
Although sometimes at odds, economic efficiency and environmental justice can coexist in effective, viable climate policy. Thoughtful policy design can help ensure that environmental benefits accrue in communities that need them the most.
Resources Magazine — Oct 4, 2023
Sailing Uncharted Waters: International Trade Becomes an Element of Climate Policy
The European Union has launched its Carbon Border Adjustment Mechanism as a way of extending its domestic climate policy to the international trade system. But aligning climate policy with international trade comes with complications.