Market Stability Reserve-Informing the EU ETS Options

A quantitative cross-evaluation of EU ETS allowance supply adjustment mechanisms for the 2030 Climate and Energy Package


The Challenge

The European Commission’s 2014 package of climate and energy policy reforms includes a legislative proposal for EU ETS reform via a supply side adjustment mechanism (the Market Stability Reserve (MSR)). The MSR is complemented by a short-term measure to postpone the auctioning of 900 million allowances (the back-loading proposal) and a downward revision of the linear reduction factor (from 1.74% to 2.2%, also from 2021). While the European Commission also discussed at length the impact of a permanent retirement of allowances, this appears to be off the table for now.

It seems unlikely that this debate will be settled purely as a result of the proposals in the European Commission’s package. In particular a quick decision on MSR is unlikely given the upcoming elections for the European Parliament, which are to be followed by the formation of a new European Commission. Furthermore, while the European Commission’s 22 January proposal derives from a consultation exercise and is accompanied by some economic impact analysis, there is currently a dearth of reliable, quantitative studies that can be drawn on, to inform this important debate. A lack of information limits the understanding of key opportunities and challenges associated with specific adjustment mechanisms and presents a risk of dogmatic rather than evidence-based evaluation of their relative merits.

The Project

The timing and information gap represents a significant opportunity to inform this highly relevant debate. Therefore, Climate Strategies is bringing together a world class research consortium to undertake a model comparison study. Model comparison exercises are a well-established way to provide a suitable framework to explore the level uncertainty, key drivers and discrepancies of model results. Combining the insights emerging from several models we therefore aim to provide robust quantitative evidence to complement the qualitative evaluation of different options proposed by the European Commission. Such an analysis can provide policy makers and market participants with a level of confidence in the design of the market stability reserve, which is simply not possible from an individual, compartmentalised, modelling approach. This proposal outlines our approach to leading a group of international, world class researchers in a model comparison study.

Modelling Team

  • Luca Taschini of the London School of Economics
  • Harrison Fell of the Colorado School of Mines
  • Florian Landis of the Centre for European Economic Research
  • Stephen Salant of the University of Michigan
  • Raphael Trotignon of the Climate Economics Chair in Paris (Université Dauphin)
  • Karsten Neuhoff of DIW Berlin
  • Bill Shobe of the University of Virginia
  • Marcus Wraeke of the Swedish Environmental Research Institute

News and Events

End of October 2014: Presentation of preliminary results

Early November 2014: Presentation of Policy Paper

Early 2015: Publishing of Academic Paper

First stakeholder consultation: October 2014

This project is considered autonomous although it is under the EU2030 project umbrella.