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

36 Pages Posted: 7 Mar 2023 Last revised: 11 Jan 2024

See all articles by Michael Pahle

Michael Pahle

Potsdam Institute for Climate Impact Research (PIK)

Simon Quemin

Potsdam Institute for Climate Impact Research (PIK); London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; Climate Economics Chair, Paris-Dauphine University PSL; EDF R&D, EDF Lab Paris Saclay, SYSTEME Department

Sebastian Osorio

Potsdam-Institut für Klimafolgenforschung (PIK); Potsdam Institute for Climate Impact Research (PIK)

Claudia Günther

Potsdam Institute for Climate Impact Research (PIK)

Robert Pietzcker

Potsdam-Institut für Klimafolgenforschung (PIK)

Date Written: April 30, 2024

Abstract

The 2023 reform of the EU Emissions Trading System (ETS) has brought to the forefront the issue of allowance market functioning in the long run. With the emissions cap designated to go down to zero by around 2040, the next decade can be said to mark the 'ETS endgame'. That is, when allowance supply approaches zero, the market is bound to undergo fundamental changes. Yet our understanding and modeling of terminal market dynamics with ever increasing allowance scarcity is limited. We analyze the changes in market conditions and behaviors, and discuss associated challenges in two steps. First, we use the numerical model LIMES-EU to illuminate the market dynamics instigated by the reform, i.e. key changes in allowance price formation, supply adjustment and abatement by sector. Second, we use our numerical results as a backdrop to identify potential frictions (financial, informational, distributional) that may arise or become exacerbated as the endgame unfolds. Besides shedding light on whether the ETS is fit for climate neutrality, these frictions further delineate alleys for future research to improve our understanding and modeling of emissions trading in the long run.

Keywords: JEL classification H23, Q52, Q58, Emissions trading, Net-zero policy design, EU ETS

JEL Classification: H23, Q52, Q58

Suggested Citation

Pahle, Michael and Quemin, Simon and Osorio, Sebastian and Günther, Claudia and Pietzcker, Robert, The Emerging Endgame: The EU ETS on the Road Towards Climate Neutrality (April 30, 2024). Available at SSRN: https://ssrn.com/abstract=4373443 or http://dx.doi.org/10.2139/ssrn.4373443

Michael Pahle (Contact Author)

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

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Simon Quemin

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

Telegrafenberg A31
Potsdam, 14473
Germany

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

Climate Economics Chair, Paris-Dauphine University PSL ( email )

EDF R&D, EDF Lab Paris Saclay, SYSTEME Department ( email )

Paris
France

Sebastian Osorio

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

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

Telegraphenberg A 31
Potsdam, 14473
Germany
+493312882436 (Phone)

HOME PAGE: http://https://www.pik-potsdam.de/members/osorio

Claudia Günther

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

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Robert Pietzcker

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegraphenberg
Potsdam, Brandenburg 14412
Germany

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