A large surplus of allowances has accumulated in the EU Emissions Trading System (EU ETS) and because businesses face uncertainty, complexity and regulatory risk, they cannot respond to this surplus efficiently. A new report finds that the credibility and consistency of the carbon price is reduced for investors and reductions of greenhouse gas emissions are delayed. The report by 12 international research institutions, convened by Climate Strategies, is based on economic models and laboratory experiments. It finds the EU Commission's proposal to retain surplus allowances in a Market Stability Reserve (MSR) is an appropriate response to restore the consistency and credibility of the carbon price.
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