Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/280455 
Year of Publication: 
2023
Publisher: 
ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg
Abstract: 
Carbon prices in the EU emissions trading system (EU ETS) are a key instrument driving Europe’s decarbonization. Between 2017 and 2021, they surged tenfold, exceeding 80 €/tCO2 and reshaping investment decisions across the electricity and industry sectors. What has driven this increase is an open question. While it coincided with two significant reforms tightening the cap (“MSR reform” and “Fit for 55”), we argue that a reduced supply of allowances alone cannot fully explain the price rise. A further crucial aspect is that actors must have become more farsighted as the reform signaled policymakers’ credible long-term commitment to climate targets. This is consistent with model results that show historic prices can be better explained with myopic actors, while explaining prices after the reforms requires actors to be farsighted. To underline the role of credibility, we test what would happen if a crisis undermines policy credibility such that actors become myopic again, demonstrating that carbon prices could plummet and endanger the energy transition.
Subjects: 
Carbon prices
EU Emissions Trading System (EU ETS)
Myopia
Foresight
Market Stability Reserve (MSR)
Policy Credibility
European Green Deal
Electricity Decarbonization
JEL: 
Q48
Q58
D84
H23
E37
D78
Document Type: 
Preprint

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