EU ETS Reform and Implications

This workshop will examine the reform of the EU ETS and its implications for the energy markets.

The increasing penetration of renewable-based generation in the electricity sector poses challenges to the operation of energy systems. This is happening not only because of the greater variability of some technologies’ generation levels, but also because such generation is promoted through support mechanisms which prevent it from being exposed to market/price signals. While improvements in the design of support mechanisms have been introduced, a shrinking share of generation is fully exposed to market signals/prices.

At the same time, support for renewable-based generation is advocated on the basis that market prices do not currently internalise some of the negative externalities associated with ‘conventional’ electricity generation. One of these externalities is clearly the impact of greenhouse gas (GHG) emissions produced from fossil fuel-based electricity generation.

The EU Emission Trading Scheme (ETS) was introduced in 2005 with the aim to address this market failure, by creating a market for GHG emission allowances (EUAs), hence setting a price for carbon emission reflecting their negative externalities. While the fundamental design of the EU ETS seems appropriate, its implementation has been hindered by the last decade’s economic crises, as well as by the overlapping targets for the different EU environmental policy objectives (energy efficiency, renewables penetration and GHG emission reductions). As a result, EUAs have been traded at lower levels, below those believed to be necessary to promote any fuel/technology switching.

The European Commission is currently revising the EU ETS for the period beyond 2020. This new system includes a new emissions reduction target of 43% by 2030 (compared to 2005 levels) and a cap which will be reduced by a linear reduction factor of 2.2% from 2021 onwards (compared to the current 1.74%). The proposal also includes a set of rules to avoid carbon leakage for sectors facing the highest risk of relocation of  production outside the EU, with a gradual phase-out of free allocation for the less exposed sectors after 2026. The Market Stability Reserve (MSR) mechanism will also be revised.

The Workshop, jointly organized by the Energy and Climate Areas of the FSR, will consider how the EU ETS might be revised to be able to address the inadequacies in its implementation, and to what extent this revision might result in higher EUA prices. A fundamental step in this process relates to the need of calibrating the EU ETS considering also the interaction with other climate and energy policies. The Workshop will also aim to assess what the implications of such higher EUA prices could be for the electricity market’s prices, as well as investigating to what extent the renewable-based generation would be able to participate in the electricity market without requiring further support.

This workshop is exclusively open to national regulators, representatives from public bodies and associate & major donors of the FSR Energy area.