The European CO2 emissions market, or EU ETS, in which Norway also participates, is an important mechanism to support the achievement of the EU’s emissions targets. The EU ETS currently covers the power sector, industry and parts of European aviation.
Regulatory framework
Each year, emissions permits are issued in line with the overall emissions cap. The quantity of permits issued is reduced each year, with the intention that emissions from those sectors covered by the scheme must fall. In the aftermath of the financial crisis, which reduced the demand for permits, a large surplus built up and has since come to characterise the market.
To address this surplus and increase the implied cost of carbon, the EU implemented several reforms to the market’s design. These have resulted in a significant increase in the cost of carbon. The introduction of the Market Stability Reserve, for example, ensures that the available supply of quotas is reduced in the event of a large surplus. The associated regulation also opens up the possibility of cancelling permits where national measures reduce emissions covered by the scheme.
There is considerable uncertainty as to how future reforms will affect the carbon price going forward and new changes to the market’s design have the potential to affect its dynamics. The inclusion of new sectors, such as international aviation and shipping, are being discussed. Understanding how these reforms might affect the carbon price and the market, and thus market actors and national emissions targets, requires thorough analysis of the market dynamics and an understanding of the energy and climate policy context.
See also: Climate and energy policy measures
The market
THEMA continuously monitors developments in the carbon market and offers both price forecasts and tailor-made analyses of the market. Future changes to the market design may change its dynamics. Therefore, there is considerable uncertainty surrounding the long-term development of the market.
Industry, generators and power consumers alike are affected by developments in the carbon market. Examples of the sorts of questions that we work on include:
- How do changes in the carbon market affect the value of power generation or additional power consumption?
- How do the costs of specific investments in reducing emissions compare with possible developments in the price of carbon?
- How does the carbon price affect the consumption of electricity, natural gas, oil and coal?
- What are the emissions impacts of measures undertaken in the EU ETS sectors?
- What is the interaction between measures taken in the EU ETS and non-EU ETS sectors?
- Which sectors might be affected by the EU ETS in the future and how should one adapt to the resultant changes?
See also: Green values
