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

25 Pages Posted: 7 Mar 2023

See all articles by Michael Pahle

Michael Pahle

Potsdam Institute for Climate Impact Research (PIK)

Claudia Günther

Potsdam Institute for Climate Impact Research (PIK)

Sebastian Osorio

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

Date Written: February 28, 2023

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

Suggested Citation

Pahle, Michael and Günther, Claudia and Osorio, Sebastian and Quemin, Simon, The Emerging Endgame: The EU ETS on the Road Towards Climate Neutrality (February 28, 2023). 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

Claudia Günther

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

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Sebastian Osorio

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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2,009
Abstract Views
5,002
Rank
13,638
PlumX Metrics