The Legal and Economic Case for an Auction Reserve Price in the EU Emissions Trading System

37 Pages Posted: 31 Oct 2019

See all articles by Carolyn Fischer

Carolyn Fischer

Resources for the Future

Leonie Reins

Tilburg University

Dallas Burtraw

Resources for the Future

David Langlet

Göteborg University - Department of Law

Åsa Löfgren

Department of Economics, University of Gothenburg

Michael Mehling

Massachusetts Institute of Technology (MIT)

Stefan E. Weishaar

University of Groningen - Faculty of Law

Lars Zetterberg

IVL Swedish Environmental Research Institute

Harro van Asselt

University of Eastern Finland - Department of Law

Kati Kulovesi

University of Eastern Finland - Law Department

Date Written: 2019

Abstract

When it was launched in 2005, the European Union emissions trading system (EU ETS) was projected to have prices of around €30/ton CO2 and to be a cornerstone of the EU's climate policy. The reality was a cascade of falling prices, a ballooning privately held emissions bank, and a decade of low prices providing inadequate incentive to drive investment in the technologies and innovation necessary to achieve long-term climate goals. The European Commission responded with administrative measures, including postponing the introduction of allowances (backloading) and using a quantity-based criterion for regulating future allowance sales (the market stability reserve); although prices are beginning to recover, it is far from clear whether these measures will adequately support the price into the future. In the meantime, governments have been turning away from carbon pricing and adopting overlapping regulatory measures that reinforce low prices and further undermine the confidence in market-based approaches to addressing climate change. The solution in other carbon markets has been the introduction of a reserve price that would set a minimum price in allowance auctions. Opponents of an auction reserve price in the EU ETS have expressed concern that a minimum auction price would interfere with economic operations in the market or would be tantamount to a tax, which would trigger a decision rule requiring unanimity among EU Member States. This Article reviews the economic and legal arguments for and against an auction reserve price. Our economic analysis concludes that an auction reserve price is necessary to accommodate overlapping policies and for the allowance market to operate efficiently. Our legal analysis concludes that an auction reserve price is not a "provision primarily of a fiscal nature," nor would it "significantly affect a Member State's choice between different energy sources." We describe pathways through which a reserve price could be introduced.

Keywords: emissions trading, auction reserve price, carbon tax, price floor, EU law

JEL Classification: Q540, Q580, K320, K340

Suggested Citation

Fischer, Carolyn and Reins, Leonie and Burtraw, Dallas and Langlet, David and Löfgren, Åsa and Mehling, Michael and Weishaar, Stefan E. and Zetterberg, Lars and van Asselt, Harro and Kulovesi, Kati, The Legal and Economic Case for an Auction Reserve Price in the EU Emissions Trading System (2019). CESifo Working Paper No. 7903. Available at SSRN: https://ssrn.com/abstract=3477716

Carolyn Fischer (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5012 (Phone)
202-939-3460 (Fax)

HOME PAGE: http://www.rff.org/~fischer

Leonie Reins

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Dallas Burtraw

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5087 (Phone)

David Langlet

Göteborg University - Department of Law ( email )

Viktoriagatan 30
Göteborg
Sweden

Åsa Löfgren

Department of Economics, University of Gothenburg ( email )

Box 640
Vasagatan 1, E-building, floor 5 & 6
Göteborg, 40530
Sweden

HOME PAGE: http://economics.gu.se/english/staff/senior_lecturers-lecturers-_researchers/asa_lofgren/?languageId

Michael Mehling

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Stefan E. Weishaar

University of Groningen - Faculty of Law ( email )

9700 AS Groningen
Netherlands

Lars Zetterberg

IVL Swedish Environmental Research Institute ( email )

Valhallavägen 81
Stockholm, 114 27
Sweden

Harro Van Asselt

University of Eastern Finland - Department of Law ( email )

Joensuu
Finland

Kati Kulovesi

University of Eastern Finland - Law Department ( email )

PO Box 111
Joensuu, 80100
Finland

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