Exploring carbon pricing beyond 2020: Europe needs to recalibrate its Emissions Trading Scheme for cost-effective decarbonisation by 2030
Entitled “Exploring the EU ETS Beyond 2020: A first assessment of the EU Commission’s proposal for Phase IV of the EU ETS (2021-2030)”, this report, written in partnership with I4CE and IFPen, provides the first complete and comprehensive assessment of the EU Commission’s proposal and its coherence with the 2030 Framework for Climate and Energy policies, demonstrating that:
- Recalibrating the EU ETS requires considering its interactions with complementary climate and energy policies by 2030. Interactions between different policies may induce additional costs vis-à-vis an optimal transition to a low-carbon economy.
- Introducing the Market Stability Reserve is necessary to support the ambition of the EU ETS. Guaranteeing MSR effectiveness calls for a governing framework to be established before 2030.
- The free allocation mechanism for Phase IV requires more flexible and targeted allocation to sectors most exposed to carbon leakage risk.
- Expanding the EU ETS scope with the inclusion of the road transport sector may not necessarily be the most cost-effective way to achieve the GHG 2030 target.
- Considering the large scale of ETS auction revenues by 2030, the use of ETS proceeds by the European Commission and by Member States constitutes an increasingly relevant funding source to support decarbonisation efforts in non-ETS sectors and to finance R&D in low carbon technologies.