Carbon pricing in the EU: Evaluation of different EU ETS reform options

Corjan Brink*, Herman R.J. Vollebergh, Edwin van der Werf

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

35 Citations (Scopus)

Abstract

This paper studies various options to support allowance prices in the EU Emissions Trading System (ETS), such as adjusting the cap, an auction reserve price, and fixed and variable carbon taxes in addition to the EU ETS. We use a dynamic computable general equilibrium model that explicitly allows for allowance banking and for a detailed cost-effectiveness analysis at the EU Member State level. We find that tightening the cap provides an ad hoc solution to the fundamental issue of the robustness of the effective carbon price, while introducing a price component to the ETS brings structural carbon price support in times of negative demand shocks for emission allowances. These price-based policies still benefit from the intertemporal flexibility through the banking provision in the EU ETS by re-allocating emissions over time with stronger emission reductions in early years and emission increases in later years. A higher emission price has a larger negative impact on the new Member States’ economies than on other Member States. Furthermore, introducing a carbon tax in addition to the EU ETS decreases the price of allowances, resulting in welfare gains for net buyers of allowances while net sellers are worse off.

Original languageEnglish
Pages (from-to)603-617
JournalEnergy Policy
Volume97
DOIs
Publication statusPublished - 2016

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Keywords

  • Auction reserve price
  • Banking
  • Carbon tax
  • Computable general equilibrium
  • European Union Emission Trading System
  • Price floor

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