EU ETS: How to mitigate instability?

The price of European Union allowances in the EU Emission Trading Scheme (EU ETS) reached an all-time high this winter, with a record high close to 100 €/t of CO2 in February 2022. This surge in allowance price levels and volatility occurs in the context of a crisis in European energy markets, with a sharp increase in commodities prices, and in a context of uncertainty about the scope and the ambition of the ongoing reform of the EU ETS.Last July, the Commission presented a legislative proposal which aims for emissions from the current EU ETS sectors to be reduced by 61% by 2030, compared to 2005 levels. To reach this target, the Commission proposes a steeper annual emissions reduction of 4.2%, following a one-off reduction of the overall emissions cap by 117 million allowances.Under the EU ETS, regulated entities buy or receive emissions allowances, which they can trade with one another as needed. At the end of each year, regulated entities must surrender enough allowances to cover all of their emissions. If a regulated entity reduces its emissions, it can keep the “saved” allowances to cover its future needs or sell them to another installation that is short of allowances. A Market Stability Reserve, in place since 2019, stabilises the market by removing surplus allowances from it.Recent market developments have raised questions regarding speculative trading, whether and to what extent the participation of financial players should be constrained, and if so, what would be the best mechanism to do so. More generally, it has revived the debate on the potential measures to stabilise EU allowances prices as Europe’s ambition to fast track the decarbonisation of its economy requires a strong and predictable carbon price signal.According to industry stakeholders, allowance price instability and lack of predictability could have significant short- and long-term consequences on the EU policy objective of fast-tracking decarbonisation, including higher compliance costs for obligated entities and higher decarbonisation costs. They underline the need for a review and potential regulation on the role of financial trading in the EU ETS market, as well as the need to address some of the structural issues that induce price instability.Relisten to this EURACTIV Virtual Conference to find out about the possible impacts of excessive speculation on the functioning of the EU ETS market. What measures could be taken to mitigate the risk of excessive speculation, and more broadly to stabilise allowances prices and improve the EU ETS market functioning?