EU ETS reform: system responsiveness and carbon market oversight - Grantham Research Institute on climate change and the environment

System Responsiveness

Under this work stream we are investigating long-term reforms to make the European Union Emissions Trading System more responsive to external economic factors and new regulations. For example, new energy efficiency or renewable obligations, as currently contemplated, are liable to affect future allowance demand. Economic factors determine the allowance demand by influencing abatement costs and, ultimately, altering the relationship between allowance supply and allowance demand. In addition, overlapping regulations can cause structural demand changes and generate excessive imbalance.

Carbon market oversight

The primary aim of oversight provisions is to ensure a stable long-term marketplace for carbon emissions. Yet, the lessons from decades of trading emissions in various markets has taught us that while markets excel in providing flexibility and aggregating information, market performance hinges on market design details. Ultimately, markets are meant to provide an opportunity for cost-minimisation of emissions reduction efforts by equating incremental abatement costs with the price of allowances. In some cases, however, some market design elements (or the lack thereof) can lead to situations where cost minimisation cannot be achieved, particularly due to low transparency and/or the presence of abusive behaviour in the market. The objective of this work is to assess the potential occurrence of market power in the European Union Emissions Trading System and to provide possible policy responses.

Publications

Taschini, L and Kollenberg, S. 2015. The European Union Emissions Trading System and the market stability reserve: optimal dynamic supply adjustment. Working Paper. London: Grantham Research Institute on Climate Change and the Environment, Centre for Climate Change Economics and Policy, London School of Economics and Political Science.

Taschini, L and Comendant, C. , 2014. FP7 Entracte project.

Taschini, L., 2013. Options for structural measures to improve the European Union Emissions Trading System: response to a European Commission consultation. Policy Paper. London: Grantham Research Institute on Climate Change and the Environment, Centre for Climate Change Economics and Policy, London School of Economics and Political Science.

Taschini, L., Kollenberg, S., Duffy, C., 2013. System responsiveness and the European Union Emissions Trading System. Policy Paper. London: Grantham Research Institute on Climate Change and the Environment, Centre for Climate Change Economics and Policy, London School of Economics and Political Science.