Europe needs to urgently prepare for carbon market ‘endgame’

(EurActiv, 28 Apr 2023) In just 16 years from now, the CO2 cap under the EU’s emissions trading scheme goes down to zero. This is hard to ignore and means no one can indulge into procrastination, argues Claudia Günther, Michael Pahle, Sebastian Osorio and Simon Quemin.

Claudia Günther, Michael Pahle, Sebastian Osorio, and Simon Quemin are researchers at the Potsdam Institute for Climate Impact Research (PIK). 

The profound implications of the recent European Union Emissions Trading System (EU ETS) reform become apparent in a single number: 2039.

Extrapolating the revised linear reduction factor used to set the cap, this marks the year when no carbon allowances will be issued in the existing EU ETS anymore. In other words, in just 16 years from now, energy companies and energy-intensive industries will only be able to use carbon allowances they have previously banked or bought from other market participants.

The “ETS endgame”, as we call it in a recent analysis, is thus clearly on its way. In this article, we argue that for regulators, policymakers and firms alike, immediate preparation for the endgame is of the essence. Waiting too long risks obfuscating the path to climate neutrality or being left behind in walking it.

What regulators need to urgently prepare for

The cap going straight down to zero raises important policy and market design questions. Can a market with fewer and fewer allowances still function at all? Might a carbon tax be necessary to complement or even replace the ETS? Will the market stability reserve tighten the cap beyond what is efficient? Could an extension of the ETS via linking to other systems or including negative emissions be the answer to dwindling supply and residual emissions?

External link

EurActiv, 28 Apr 2023: Europe needs to urgently prepare for carbon market ‘endgame’