Set aside - an EU ETS intervention worth the risk
In a new policy paper from Fores, Daniel Engström Stenson and Christofer Sköld argue that the EU should set aside a large amount of emission allowances from the EU ETS. This as a result of the current surplus of allowances. The authors conclude that:
- A set-aside is only a second best option, if it is not possible to reach an agreement on the EU moving to a 30 percent reduction target to 2020. An agreement on 30 percent creates more predictability than the set-aside. To achieve real predictability and long term price effects EU also has to agree on long-term targets after 2020, leading up to 2050.
- Current low prices are not only a cyclical result of the recession, but partly or even mainly the result of a structural oversupply of emission allowances and additional EU measures on energy efficiency that have led to a surplus and unexpectedly cheap allowances.
- Essentially a low emissions price signals that emission reductions are cheap, and that there is ample scope for more reductions at a modest cost. Hence, emission reductions should be the prime aim of a set aside.
- The number of allowance set-aside matters. Any set-aside should at least significantly exceed the allowances to be carried over from Phase II to Phase III.
- In order for the set-aside to be an emission reducing mechanism, which is preferable, allowances needs to be retired (cancel the allowances). If allowances are not cancelled, a set aside is nothing more than a price control mechanism, at best. A set-aside of 1.4 billion may, according to estimates, result in an allowance price around €17 that would create a significant (one third) increase in revenues from emission auctioning, and could contribute to the European public finances. For business with a surplus of allowances, it will also bring more revenues.
- The rules governing the set-aside must be clear and well-defined. This paper concludes that the most efficient and most feasible ways to make a quick correction of the EU ETS by using a setting-aside mechanism would be, in order of preference:
1.Set-aside at least 1.4 billion allowances with clear guidelines to cancel them. In this option, setting aside means withdrawing the set-aside permanently after opening up the directive during Phase III.
2.Set-aside at least 1.4 billion allowances, with a view to return them during phase III, if the price rises above €50. The non-returned allowances could be cancelled at the end of phase III. If the low price turns out to be the result of the recession, the release of the set-aside would then soften the price increase as economic activity picks up.
3.Set-aside at least 1.4 billion allowances, keep them outside the system no matter what during phase III with a view to return them to the market after 2020, should the price rise above €50.
A set aside with no strict guidelines on if and when allowances are to be returned is to prefer over non-action, but it comes with a risk. If the decision on what to do with the set-aside allowances is procrastinated, it runs the risk of leading to further uncertainties, without neither pushing the price nor reducing emissions.
About the Study
Set aside allowances - an EU ETS intervention worth the risk?