The EU ETS is unprepared for 2040 and beyond

Silvester van Koten

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: The central instruments of a cap-and-trade program are its abatement schedule and a system of guardrails designed to prevent permit prices from becoming excessively high or low. I argue that these instruments are currently poorly aligned in the EU’s cap-and-trade flagship climate policy, the EU ETS. I argue that the abatement schedule risks being overly ambitious and that the ETS’ existing guardrails, the Market Stability Reserve (MSR), do not offer sufficient protection against extreme prices. This misalignment may result in substantial economic costs and could ultimately undermine public support for the ETS. This paper recommends consideration of more effective guardrails, such as the well-established the price collar as implemented in California’s cap-and-trade program.

Keywords: EU Emissions Trading System (EU ETS); Market Stability Reserve (MSR); net zero; abatement path; price collar (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-ene and nep-eur
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