The Emerging Endgame: The EU ETS on the Road Towards Climate Neutrality

Abstract

The EU Emissions Trading System was recently reformed to make it ‘fit for 55’ by 2030, with the cap on emissions designated to go down to zero by 2040. It is thus widely believed that the next decade will mark the ‘ETS endgame’: when supply approaches zero, the market will undergo fundamental changes and may even cease to function at all. We address the question of which endgame challenges may arise for the ETS with the reformed design. First, we conduct a ceteris paribus analysis based on the numerical ETS model LIMES-EU in a bid to identify anticipation effects. Second, going beyond the numerical modelling, we reflect on and discuss new developments and economic considerations, drawing on the emerging literature and identifying research gaps. The vast range of possible developments suggests that the ETS may as well not be in an endgame, implying ambiguity about the long-term nature of the market that further exacerbates long-term price uncertainty. This puts into question whether the ETS is fit for climate neutrality, and raises the issue of how governance and stability mechanisms must be adjusted to account for it.

Keywords: Emissions trading, Climate neutrality, Policy design and evaluation, EU ETS

JEL Classification: H23, Q52, Q58