Beyond Control: Policy Incoherence of the EU Emissions Trading System

Open Access Journal | ISSN: 2183-2463

Article | Open Access

Beyond Control: Policy Incoherence of the EU Emissions Trading System


  • Maximilian Willner Department of Socioeconomics, University of Hamburg, Germany
  • Grischa Perino Department of Socioeconomics, University of Hamburg, Germany / Center for Earth System Research and Sustainability (CEN), University of Hamburg, Germany


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Abstract:  In this article, we explain why the current climate policy mix of the European Union (EU), consisting of the EU Emissions Trading System (ETS) and overlapping policies, is incoherent with respect to emission abatement and cost-effectiveness. The concept of policy coherence guides our analysis in identifying the EU ETS’ current dynamic supply adjustment mechanism, the Market Stability Reserve (MSR), to be at the heart of the shortcomings of current market design. Incoherence emerges due to the MSR’s quantity-based indicator for scarcity. It only works well for current and past demand fluctuations, but not for anticipated changes in demand, e.g., caused by a member state’s fossil-fuel phase-out. As a result, instead of fostering synergies as intended, the MSR undermines coherence by creating backfiring interactions and making precise predictions of overlapping policies’ impacts close to impossible. Considering the European Commission’s reform proposal of July 2021, we argue that a change in the MSR’s parametrisation leaves the fundamental cause of incoherence unaddressed. Based on recent findings in the economics literature, we propose introducing a price-based indicator for scarcity as a solution to substantially reduce the current incoherence of the policy mix.

Keywords:  climate policy; emission trading; EU ETS; market stability reserve; overlapping policies; policy analysis; policy coherence

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DOI: https://doi.org/10.17645/pag.v10i1.4797


© Maximilian Willner, Grischa Perino. This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 license (http://creativecommons.org/licenses/by/4.0), which permits any use, distribution, and reproduction of the work without further permission provided the original author(s) and source are credited.