Research and analysis

Assessing design options for a Market Stability Reserve in the EU ETS

Report assessing design options for a Market Stability Reserve in the EU ETS.

Documents

Assessing design options for a market stability reserve in the EU ETS.

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Peer review of Study: ‘Assessing design options for a Market Stability Reserve in the EU ETS'.

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Detail

To inform the UK government’s position on the European Commission’s proposal to establish a Market Stability Reserve (MSR), an external research project was commissioned by Department of Energy & Climate Change and undertaken by Ecofys and London School of Economics (LSE), to assess design options for a Market Stability Reserve in the EU ETS. In January 2015, we published the findings from this project.

The project investigates the effectiveness of a range of MSR design options using a mix of economic modelling, literature review and stakeholder interviews. The report shows the current design of the EU ETS combined with the relatively short term outlook of market participants (compared to long-term emission reduction targets) results in weak investment responses to the carbon market. When businesses postpone investment in emission abatement there are increased risks of more costly, rapid investment being required later and of high carbon lock-in and stranded assets in a transition to tighter targets.

Modelling analysis shows that that the introduction of an MSR lowered overall EU ETS compliance costs in reaching long term targets, due to its effects on stimulating earlier abatement. Timing of implementation of the MSR was the single biggest factor determining the extent of these cost reductions, with greater cost reductions if an MSR was introduced in 2017 rather than 2021.

The views expressed in the report are those of its writers, and do not represent an official position of the UK government.