The Revision of the European Union Emissions Trading System Directive: Assessing Cap and Market Stability Reserve Reform Options

SUMMARY:

The European Union Emissions Trading System (EU ETS) is a central element of EU climate policy. The successful reform of the EU ETS is thus crucial for the implementation of the objectives of the European Green Deal. Reforms are required in the following four aspects of the EU ETS.

RECOMMENDATIONS

• The cap of the EU ETS is a key element of the climate policy architecture which has a strong impact on the design of other commitment mechanisms (e.g. the Effort Sharing Regulation) if the emission reduction targets that are binding under EU and international law are to be achieved.
• In order to achieve the targets set with the EU ETS cap under real-world conditions, the EU ETS must be designed as an incentive instrument in such a way that the cap-based targets for 2030 can also be effectively achieved.
• The definition of the EU ETS cap via the Linear Reduction Factor (LRF) is also an informational instrument that sends a clear signal to the market about the time frame in which climate neutrality is to be achieved.
• The EU ETS is also an important instrument for generating financial resources for the transition to a decarbonised society and economy and its accompanying measures. Against this background, the upcoming reform of the EU ETS will require adjustments on various levels.