Splitting the EU ETS: strengthening the scheme by differentiating its sectoral carbon prices
Splitting the EU ETS: strengthening the scheme by differentiating its sectoral carbon prices / J.P.M. Sijm, H. Pollitt, W. Wetzels,U. Chewpreecha & P. Koutstaal. Energy Research Centre of the Netherlands (ECN) and Cambridge Econometrics (CE), May 2013, 138 p. (ECN–E–13-008)
Abstract (© ECN) :
The current EU ETS faces a dilemma. To induce low-carbon investments in the power sector, higher carbon prices are needed, while low carbon prices are needed to reduce the risk of carbon leakage and loss of industrial competitiveness. This study analyses the effects and implications of two alternative policy options to address this price dilemma, i.e. (i) splitting the ETS into two separated sector regimes: one more ambitious regime with a relatively high carbon price for the power sector and a less ambitious regime with a relatively low carbon price for the other sectors covered by the EU ETS (called ‘industry’), and (ii) imposing a carbon tax on power sector emissions additional to a single ETS carbon price for both industry and the power sector. The study uses modelling scenarios and qualitative assessments to analyse the effects and implications of these policy options. It concludes that, in a world with unequal carbon prices, there is a case for differentiating ETS sectoral carbon prices and that the first-best option to achieve this differentiation is to impose a carbon tax on power sector emissions additional to a single ETS carbon price.