Interactions between the European Emissions Trading System and Complementary Energy Policies
I4CE – Institute for Climate Economics and Enerdata publish an article in the French Review of Energy N° 628, in November-December 2015.
After three Phases of functioning, the EU ETS meets new challenges in preparation of its Phase IV. Indeed on July 15th, the European Commission published a proposal for a revision of the EU ETS Directive for the post 2020 period. This proposal provides a 43% emissions reduction target for the EU ETS and a linear reduction factor increased to 2.2% from 2021. This new ambition is embedded in an energy and climate package composed with a binding 40% GHG reduction compared to 1990, a binding 27% share of Renewable Energy Sources (RES) in gross final energy consumption, and an indicative 27% energy efficiency (EE) improvement compared to 2007 baseline – both without any binding targets for Member States. Such a design of the energy and climate policies package raises the issue of interactions between these policies and their impacts on the EU ETS, presented as the central pillar of the European climate policy.
This article aims at examining, in a first section, interactions between the EU ETS and complementary energy policies during Phases II and III and their consequences on European allowances (EUA) surplus. Then, results from the POLES model provide an assessment of energy and climate policies in the EU up to 2030, with only a GHG emissions target and further with additional RES and EE targets. Based on lessons from the 2020 energy and climate package, recommendations are provided to manage interactions between the EU ETS and complementary energy policies in order to improve the cost-effectiveness.
- An unique GHG emission reduction target may allow achieving the decarbonization objective at lower cost. The combination of different objectives may have significant impacts on the cost of transition to a low carbon economy.
- However, complementary instruments are necessary because of a wide array of barriers to entry hampering to exploit the full decarbonisation potential at lower cost in the short and long term. Besides, carbon prices are not always able to encourage sufficient innovation and diffusion of clean technologies because of the inability to appropriate the full benefits of innovation –so called technology spill-over market failures.
- The impact of the whole set of instruments on the carbon price should be however carefully assessed and justified in a transparent and comprehensive manner.
- Drawing on the 2020 EU energy and climate framework lessons, where energy efficiency measures and permits offsets account for more than half of the surplus, the EU ETS cap setting should account for these instruments.
- Some flexibility is necessary in the supply of allowances to improve the resilience of the EU ETS. The correct balance must be found between improving long term predictability so as to increase investor confidence, and increasing flexibility for greater stabilization. The Market Stability Reserve has been adopted, and its efficiency at addressing this issue needs to be analyzed carefully.