Credibility makes or breaks the price

CAPABLE and ECEMF Webinar on JUNE 19, 2024 – 2-3PM

Title: “Credibility makes or breaks the price: political commitment in long-term climate policy key for effective EU emissions trading system”

Speaker: Robert Pietzcker leads the National Energy Transitions Team in the Energy Systems group at the Potsdam Institute for Climate Impact Research (PIK). A physicist and economist by training, his work focuses on analyzing the energy transition in the EU and Germany, and providing insights on the climate policies needed achieve greenhouse gas neutrality.

Moderator: Johannes Emmerling, RFF-CMCC European Institute on Economics and the Environment (EIEE),, Fondazione Centro Euromediterraneo sui Cambiamenti Climatici (CMCC)

During the webinar, Dr. Robert Pietzcker will present the main insights from the paper “EU carbon prices signal high policy credibility and farsighted actors” recently published in Nature Energy (Sitarz et al, 2024), and discuss the importance of considering short- or farsightedness of firms when designing climate policies.

Paper abstract:

Carbon prices in the EU emissions trading system (EU ETS) are a key instrument driving Europe’s decarbonization. Between 2017 and 2021, they surged tenfold, exceeding 80 €/tCO2 and reshaping investment decisions across the electricity and industry sectors. What has driven this increase is an open question. While it coincided with two significant reforms tightening the cap (“MSR reform” and “Fit for 55”), we argue that a reduced supply of allowances alone cannot fully explain the price rise. A further crucial aspect is that actors must have become more farsighted as the reform signaled policymakers’ credible long-term commitment to climate targets. This is consistent with model results that show historic prices can be better explained with myopic actors, while explaining prices after the reforms requires actors to be farsighted. To underline the role of credibility, we test what would happen if a crisis undermines policy credibility such that actors become myopic again, demonstrating that carbon prices could plummet and endanger the energy transition. Link to the paper: https://www.nature.com/articles/s41560-024-01505-x.

The ECEMF project has received funding from the European Union’s Horizon 2020 research and innovation program under grant agreement No 101022622.

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