Open AccessShifting concerns for the EU ETS: are carbon prices becoming too high?
Author(s) -
Reyer Gerlagh,
Roweno J.R.K. Heijmans,
Knut Einar Rosendahl
Publication year - 2022
Publication title -
environmental research letters
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.37
H-Index - 124
ISSN - 1748-9326
DOI - 10.1088/1748-9326/ac63d6
Subject(s) - emissions trading , carbon market , flattening , greenhouse gas , economics , carbon price , carbon fibers , carbon offset , international economics , monetary economics , natural resource economics , environmental science , ecology , materials science , composite number , composite material , biology
Carbon prices in the EU Emissions Trading System (EU ETS) have risen from around 5 euro per ton of CO2 in 2017 to above 90 euro in 2021. One likely explanation is the cancellation mechanism implemented along with the Market Stability Reserve (MSR) of the EU ETS in 2018. We identify realistic conditions under which the MSR results in truly massive cancellation of emissions allowances, pointing to the steepness of the emissions pathway over time as essential. A flattening of the emissions pathway (for example due to low interest rates or an increased climate ambition) implies huge reductions in the cumulative supply of emissions allowances, creating greater scarcity and therefore much higher carbon prices. The concerns about too low and `ineffective' carbon prices may turn into concerns for too high prices. Our results have important ramifications for planned revisions of the EU ETS.