Project Appraisal in the Reformed EU ETS: Looking for Shortcuts

CERE Working Paper, 2020:17

22 Pages Posted: 3 Mar 2021

Date Written: December 23, 2020


The European Union’s Emissions Trading System, EU ETS, has been reformed, shifting the system from a fixed-cap system into a system with an endogenous supply of permits. This paper discusses how to handle the scheme in project appraisal. The focus is on a few relatively straightforward empirical approaches that can be used to approximate how the path of the endogenous supply of permits is affected by an exogenous change in emissions. A particularly surprising feature of the reformed scheme is that an exogenous increase in emissions could cause a reduction in total emissions, a kind of Green Paradox. In addition, overlapping national policies as well as the Paris Agreement to combat climate change that entered into force on 4 November 2016 could neutralize any exogenous impact of the project, reintroducing the ‘waterbed’ so that the project is evaluated as if it sorted under a fixed-cap system. The paper proposes a couple of shortcuts that hopefully simplify economic evaluations of projects affecting the supply of permits. For convenient reference, the paper also lays out the mechanics of the reformed system.

Keywords: Cost–benefit analysis, permits, waterbed puncture, endogenous cap, ETS, climate gases, Paris Agreement

JEL Classification: H23, H43, Q51, Q54

Suggested Citation

Johansson, Per-Olov, Project Appraisal in the Reformed EU ETS: Looking for Shortcuts (December 23, 2020). CERE Working Paper, 2020:17, Available at SSRN: or

Per-Olov Johansson (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
+46 8 736 92 82 (Phone)
+46 8 30 21 15 (Fax)

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