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COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV

Environmental Studies and Forestry

COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV

K. Bruninx and M. Ovaere

Discover how shocks like COVID-19 and ambitious policies such as the European Green Deal are transforming the EU emissions trading system. This research by Kenneth Bruninx and Marten Ovaere reveals the potential for a significant reduction in cumulative carbon emissions and the surprising dynamics of allowance prices in response to these changes.

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Playback language: English
Abstract
The EU emissions trading system's (ETS) invalidation rule implies that shocks and overlapping policies can change cumulative carbon emissions. This paper explains these mechanisms and simulates the effect of COVID-19, the European Green Deal, and the recovery stimulus package on cumulative EU ETS emissions and allowance prices. Our results indicate that the negative demand shock of the pandemic should have a limited effect on allowance prices and rather translates into lower cumulative carbon emissions. Aligning EU ETS with the 2030 reduction target of -55% might increase allowance prices to 45-94 €/ton CO2 today and reduce cumulative carbon emissions to 14.2-18.3 GtCO2 compared to 23.5-33.1 GtCO2 under a -40% 2030 reduction target. Our results crucially depend on when the waterbed will be sealed again, which is an endogenous market outcome, driven by the EU ETS design, shocks and overlapping climate policies such as the recovery plan.
Publisher
Nature Communications
Published On
Mar 04, 2022
Authors
Kenneth Bruninx, Marten Ovaere
Tags
EU emissions trading system
carbon emissions
allowance prices
COVID-19
European Green Deal
climate policies
market dynamics
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