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EU Emissions Trading Scheme and an Optimal Mix of Climate Policies

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The Emissions Trading Scheme (ETS) creates a framework for reducing EU-wide emissions by placing a price on emitting carbon. Since the third phase of the ETS introduced the auctioning of allowances from 2013 on, it is increasingly clear that the price signal sent by the ETS will require other policies to drive the deep emissions reductions needed by 2050.

RAP sets out an optimal mix of “complementary policies” that link with the ETS to help Europe achieve its climate objectives by 2050 at the least cost to society. A smart suite of policies will combine with the ETS to bolster European competitiveness and trigger resource-efficient economic growth.

One of RAP’s central recommendations is implementation of a “cap and invest” strategy, whereby Member States set aside a portion of auction revenues for energy efficiency improvements. This approach will help the ETS deliver least-cost emissions reductions, reduce power bills, and maximise the societal value of each euro spent to avoid a tonne of CO2. Cap and Invest: The Economic Benefits of Investing EU ETS Auction Revenues into Energy Savings summarizes these benefits based on the key findings of a modelling study commissioned by RAP, and conducted by Cambridge Econometrics (CE) and Energy Research Centre of the Netherlands (ECN).

In addition, RAP draws on international experience to suggest complementary policies that can create an effective “retirement plan” for high-emissions generation in Europe. Emission Performance Standards: Global Practice and Options for Europe—a November 2014 presentation to the European Parliament—describes a number of options for this purpose. Key recommendations in designing such a retirement plan include:

  1. Do no harm. Avoid life support mechanisms (e.g., badly-designed capacity mechanisms) for high-emissions units;
  2. Schedule “timely exits” for units in need of major upgrades or at end of economic useful life;
  3. Create “early exit” incentives for units that choose orderly shut-down ahead of mandates; and
  4. Consider how to create an “on ramp” for carbon capture and sequestration in the process.

Listen in as Richard Cowart discusses emissions trading in the U.S. and EU at part of the Institute of International and European Affairs event Carbon Prices, Consumer Costs, and Efficiency Solutions – Climate Action in the U.S. and Ideas for Europe on 22 June 2009.