EU ETS Regulatory Design: And the European Transition to a Green Economy

Tine Simonsen Cato

Student thesis: Master thesis

Abstract

The European Union Emissions Trading System (EU ETS) was launched in 2005 with the aim of driving Europe’s transition to a greener economy. However, this transition requires two things: first, an 80-95% reduction of greenhouse gasses (GHGs), second, the development of cost-effective replacement technologies that can substitute fossil fuels as they are gradually extracted from the European energy equation. Currently, the EU ETS is facilitating neither to the fullest. While European GHG emissions have been cut by more than 10% between 2008-2012, the European Commission suggests that this abatement is primarily a product of the financial crisis, and not of the emissions trading system. Furthermore, the Commission has suggested that the current EU ETS design does not encourage companies to investment in replacement solutions. If the EU ETS is to play an increased role in the green transition, a regulatory re-design is therefore in order. This dissertation presents a new way for ETS designers to think about how such a re-design can encompass the two requirements associated with the green transition. With the current design as a benchmark, three regulatory solutions - two price-based and one quantity-based - are analyzed based on their ability to increase investment incentives without compromising the system’s other objectives. Despite the European Commission’s preference for a quantity-based mechanism, this dissertation concludes that if the EU ETS is to incentivize the required investments in replacement technologies, the ideal solution is to implement a price floor in the emissions trading system.

EducationsMSc in International Business and Politics, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2015
Number of pages100