ETS and Corona Crisis

Hans-Josef Fell just published his thoughts on how the corona crisis influences the debate on climate (in German).

He mentioned that the price for emission permits under the EU emission trading system (ETS) has gone down, along with everything else. That in turn means that there is less incentive for avoiding emissions.

That is correct, as far as it goes. However, while the price for individual emissions may have gone down, at least in the European system the cap on allowed emissions does not change with market conditions. If anything, a lower price means success in reducing emissions, since less permits are needed when emissions are down. And they are down. Germany may even meet its 2020 goal now.

The ETS cap is a cap on demand in Europe. That cap has not changed in any way. And it is also a model for the worldwide cap on supply that is needed. Once the last missing link is in place and it becomes possible to effectively require production permits for each barrel of oil, such a system would be completely independent from market conditions. It does not matter how much the production quota for one barrel of oil cost for the question of how much can be pumped world wide. That would be fixed, just like the cap on demand in the ETS is fixed right now.

So I don’t share Fell’s negative position. All things equal, it is better to have a demand reduction system like ETS than not to have it.

If anything, getting emission levels way down (just as they were way down as a consequence of the Lehman shock a decade earlier) is an excellent occasion to aim for higher levels of reductions when the EU Commission actually decides on the new goals for 2030 later this year. While the price of one permit does not matter for the cap under existing rules, beating the emission goals matters a lot when discussing adjusting those goals for more ambitious ones.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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