National Climate Policies and the European Emissions Trading System

We set up a model of the European Emissions Trading System (ETS) to evaluate the prospects for the system after the recent reform. Our simulations indicate that the current allowance surplus may not disappear before the 2050s. They also show that the mechanics of the new Market Stability Reserve imply that annulment of allowances by an EU member state may be largely ineffective, whereas national emission reductions can permanently reduce EU-wide CO2 emissions. We suggest that the next ETS reform should include a floor and a ceiling for the price of emission allowances.