Carbon prices on the rise? Shedding light on the emerging EU ETS2 *

Abstract

As of 2027 the EU will rely on a second Emission Trading System (ETS2) to cap emissions in the buildings, road transport and other sectors. Uncertainty about how high prices could rise and related drivers is substantial. In light of this, we explore ETS2 price paths using the energy system model PRIMES. We focus on the effect of complementary efficiency policies (EPs), as earlier research suggests they could have profound impact. Indeed, analysing three scenarios with different EPs stringency, we find that they make ETS2 prices vary between 71 EUR/t (strong EPs) and 261 EUR/t (weak EPs) in 2030. With a view on Germany, in all three scenarios similar emission reductions (-42%) are achieved, implying marginal abatement costs are at least 261 EUR/t regardless of the instrument effective at the margin. Last, we discuss the link between ETS2 and ESR targets. Key policy insights-Modelled ETS2 prices lie in the range of 71 to 261 EUR/t, depending on the stringency of complementary energy efficiency policies assumed in the various scenarios-The more stringent energy efficiency policies are, the lower the ETS2 price

Keywords: Emissions trading, EU ETS, ETS2, Energy efficiency