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.