The European Union emissions trading scheme failure analysis and assessment of market stability reserve solution

Abstract

The European Union Emissions Trading System (EU ETS) is presented to be the cornerstone of European Union climate policy to reduce greenhouse gas emissions. Implemented in 2008, it is the first, and still the biggest international trading system for GHG emissions. European Union set a goal of reaching 20% reduction of GHG in 2020 compared with 1990 level. This target has already been achieved in 2014. Tantalizingly, this could mean that EU ETS works perfectly and has been very efficient in reducing GHG emissions. The main goal of EU ETS was to reduce emissions by sending right price signal to induce implementation of low carbon technology. Fuel-switching carbon price, which is the price that makes stakeholders indifferent between burning gas or coal is calculated to be slightly above 30 EUR per tCO2.Yet, the average price of EU allowance under EU ETS oscillated at around 5 EUR per tCO2 for the most of the EU ETS period. The objective of this Master thesis is to answer why the price has been so low and why this is a problem. The thesis describes all the main factors contributing to the price failure. It takes into account over-allocation in original caps, oversupply of UN offset credits, economic downturn, rising gas prices and other legislative loopholes. Finally, it concludes the EU ETS has failed so far to send right price signal to promote fuel switching. The thesis proves EU ETS did not contribute to the early achievement of EU target in 2014 of reducing 20% GHG emissions from 1990 level. Moreover, the planned reforms with Market Stability Reserve (MSR) Solution in the foreground are presented and assessed. The thesis will try to answer the key question if MSR is going to improve the EU ETS scheme and if yes, to which extent.