The European Emissions Trading Scheme (EU ETS) is currently unable to fulfil its role as a leading climate policy instrument: surpluses in the market have pushed the price of emission allowances down over a long period of time and weakened incentives created by the EU ETS. The caps are structurally set too high and not sufficiently coordinated with interacting energy and climate policy instruments. Given the weak price signal from the EU ETS, more and more EU Member States are currently planning to introduce - or have already implemented - additional national climate or energy policy instruments in order to achieve their national climate protection targets. These additional emission mitigation measures however, can lead to a shift of emissions within the EU ETS and further weaken the price signal unless the allowance supply is reduced correspondingly.
The new position paper of the German Environment Agency (UBA) provides concrete recommendations for the structural reform of the EU ETS in order to improve the compatibility with interacting energy and climate policy:
The ETS cap-setting cycle should be shortened to five years and aligned with an ambitious long-term reduction path. The German Environment Agency recommends an increase of the linear reduction factor to at least 2.6 percent for the 2021–2025 period.
- The ETS cap must not be set above the predicted emissions. The adequacy of the cap level for the fourth trading period must be checked against the background of the known energy and climate policy instruments and then adjusted accordingly.
- The emission reducing effect of interacting climate and energy policies – at national and European level – needs to be recorded more carefully than previously and quantitatively taken into account for any determination of the ETS cap.
- Emission and demand reductions in the EU ETS triggered by interacting national policy measures must be counterbalanced by the Member States in the form of reductions in supply in the EU ETS (preferably by reducing auction volumes).
- Surpluses in the EU ETS that will accumulate until 2020 and partly transferred to the Market Stability Reserve (expected to be more than three billion allowances) should be, to a great extent, permanently cancelled.