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CO2 emissions trading in the EU

4 February 2016

Begin February one of the last CATO-2 PhD students, Arnold Mulder, successfully defended his PhD thesis "CO2 emissions trading in the EU" at the University of Groningen.


Despite early hopes that the EU CO2 emission trading (ETS) scheme could trigger investments in greenhouse gas reduction technologies around Europe, its ability to do so has fallen far below prior expectations. The current cost to allow a company to emit one tonne of CO2 is around 5 €. This is far below the extra cost needed to reduce the same amount of CO2 with for example wind energy or CO2 Capture and Storage. Policymakers now face the challenging task to revitalize the EU ETS and bring its ability to trigger investment in line with policy objectives.
In his thesis, Arnold Mulder examined the performance of the EU ETS with a dynamic stochastic simulation model of the scheme. He found that although the price of an EU CO2 emission allowances is too low trigger large investments in CO2 reduction technologies, the uncertainty of the future price development is eben a bigger show stopper. He recommends therefore: "if policymakers want to ensure that the EU ETS can structurally provide an incentive for technologies with high capital requirements and lead times such as CCS, they are advised to shift their efforts from supply restrictions to measures that can reduce the allowance price uncertainty that investors face. Such measures could, for example, take the form of price floors and ceilings."
The second important conclusion from his thesis is that so called parallel policy instruments, like subsidy for renewables and an obligation to co-fire biomass, often interact adversely with the performance of the EU ETS. He showed that that these parallel policy instruments the decrease the price of CO2 allowances, which results in lower investments in low carbon technologies. In other words, although subsidy for solar and wind energy may be very effective in introducing this, the total CO2 reduction in the EU is limited as the price of the CO2 allowances is decreased.


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4 February 2016

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