Author Description

"The EU ETS (Emissions Trading System) is a pure regulatory construct and one that has functioned well as a market. An ETS should be the most cost-effective system to promote reductions in greenhouse gases and act as the cornerstone in EU's climate policy. Currently, some have the perception that the EU ETS has not delivered on some of its implicit objectives, including to serve as an instrument to encourage investments to meet long-term targets for GHGs in 2050. A supply imbalance has been observed in the EU ETS, possibly temporary, which has led to some volatility in the market. As a result, a number of issues, real or perceived, need to be addressed: a) A significant oversupply in the market that may linger beyond 2020 b) A large supply coming in 2012-13 c) An inflexible ETS on the supply side d) The need to provide for longer-term structural changes that will affect the EU ETS, including other policies and measures that may be needed to accompany the ETS in some areas. In providing answers, we need to make sure that we know which market failure, or potential market failure, we aim to address. Backloading can only be introduced as a measure to address a market imbalance and ensure good market functioning. It should not be a measure to target a price outcome. If implemented on its own, backloading will likely lead to the need for further one-off interventions, which should be avoided. It should be part of a set of measures that will include, as a next step, an examination of long-term structural measures that are needed to address points c & d above. If backloading is to be an effective tool, it should have a number of characteristics: It should be significant and forceful to ensure a strong political and economic signal. Communication must be clear and unambiguous. A significant time lag between when the set aside takes place and when the volumes may be returned to the market. The volume of backloading should be larger in 2013"--Executive summary.