Causes of the EU ETS Price Drop: Recession, CDM, Renewable Policies or A Bit of Everything? — New Evidence

Energy Policy, Vol. 73, 2014

Posted: 8 May 2015

See all articles by Nicolas Koch

Nicolas Koch

Mercator Research Institute on Global Commons and Climate Change (MCC); University of Hamburg

Godefroy Grosjean

Potsdam-Institut für Klimafolgenforschung (PIK)

Sabine Fuss

Mercator Research Institute on Global Commons and Climate Change (MCC); International Institute for Applied Systems Analysis (IIASA)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: June 1, 2014

Abstract

The price of EU allowances (EUAs) in the EU Emissions Trading Scheme (EU ETS) fell from almost 30€/tCO2 in mid-2008 to less than 5€/tCO2 in mid-2013. The sharp and persistent price decline has sparked intense debates both in academia and among policy-makers about the decisive allowance price drivers. In this paper we examine whether and to what extent the EUA price drop can be justified by three commonly identified explanatory factors: the economic recession, renewable policies and the use of international credits. Capitalizing on marginal abatement cost theory and a broadly extended data set, we find that only variations in economic activity and the growth of wind and solar electricity production are robustly explaining EUA price dynamics. Contrary to simulation-based analyses, our results point to moderate interaction effects between the overlapping EU ETS and renewable policies. The bottom line, however, is that 90% of the variations of EUA price changes remains unexplained by the abatement-related fundamentals. Together, our findings do not support the widely-held view that negative demand shocks are the main cause of the weak carbon price signal. In view of the new evidence, we evaluate the EU ETS reform options which are currently discussed.

Keywords: EU ETS, Carbon price, Renewables

JEL Classification: C22, Q42, Q54, Q58

Suggested Citation

Koch, Nicolas and Grosjean, Godefroy and Fuss, Sabine and Edenhofer, Ottmar, Causes of the EU ETS Price Drop: Recession, CDM, Renewable Policies or A Bit of Everything? — New Evidence (June 1, 2014). Energy Policy, Vol. 73, 2014. Available at SSRN: https://ssrn.com/abstract=2603107

Nicolas Koch (Contact Author)

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

University of Hamburg ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Godefroy Grosjean

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Sabine Fuss

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany
49303385537224 (Phone)
303385537224 (Fax)

HOME PAGE: http://www.mcc-berlin.net

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, 2361
Austria

HOME PAGE: http://www.iiasa.ac.at

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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