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Climate policy

Reforming emissions trading

Nature Climate Change volume 4, pages 663–664 (2014)Cite this article

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Courageous steps are required to reform the European Union Emissions Trading Scheme. To this end, an independent carbon authority has been proposed — this is a move in the right direction, but should be part of a much broader discussion about reforming emissions trading.

A recent study carried out by Koch et al.4 showed that the global economic recession, renewable support schemes, the inflow of carbon credits and gas and coal prices can only explain about 10% of the price decline in the EU ETS over the period 2008–20134. Thus, the question of what drives the price of allowances at times of temporarily non-binding caps remains unanswered. Koch et al.4 suggest that EU policymakers have destabilized the long-term expectations of investors. In particular, the announcement of back-loading (that is, delaying the auctioning of allowances to stabilize prices) and a number of structural reforms to strengthen the EU ETS were apparently not perceived as credible by investors and traders. The low price of futures contracts for the year 2020, shown in Fig. 1, indicates that traders anticipate only a modest long-term scarcity of emission permits in the market. As such, neither back-loading nor the structural reform proposals seem to have significantly changed long-term expectations.

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Figure 1: Price paths of European emissions allowance (EUA) futures contracts traded on the ICE European Climate Exchange.

References

  1. EU-27 Gross Inland Consumption of Hard Coal 1990–2012 (EC Eurostat, 2014); http://go.nature.com/HMhdlW

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  5. Grosjean, G. et al. After Monetary Policy, Climate Policy: Is Delegation Key to EU ETS reform? (MCC, 2014); http://go.nature.com/4xnv7x

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  1. Department of Economics of Climate Change, Ottmar Edenhofer is at the Technische Universität Berlin, EB 4-2, Strasse des 17. Juni 145, D-10623 Berlin, Germany, and at the Mercator Research Institute on Global Commons and Climate Change (MCC), Torgauer Strasse 12-15, D-10829 Berlin, Germany, and at the Potsdam Institute on Climate Impact Research (PIK), Telegraphenberg A 31, D-14473 Potsdam, Germany,

    Ottmar Edenhofer

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  1. Ottmar Edenhofer
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Correspondence to Ottmar Edenhofer.

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Edenhofer, O. Reforming emissions trading. Nature Clim Change 4, 663–664 (2014). https://doi.org/10.1038/nclimate2327

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