Strengthening the EU ETS price signal. Implementing an explicit, predictable and steadily increasing auction reserve price on carbon within the EU ETS to favor low-carbon investments

The EU ETS shows a surplus of allowances, and several issues related to the price signal: it is too weak, lacks predictability, and risks collapsing at any time despite increasing climate ambitions. We support the Market Stability Reserve and we recommend implementing an auction reserve price starting at Euros 20/tCO₂ and increasing over time. In addition to the 'quantity-only' reform set in motion by the European Commission, this 'price also' approach would prevent the market from 'revealing' higher prices too late - i.e. at a time when carbon-intensive solutions are already locked-in. This paper shows that all 2 deg. C scenarios converge towards a robust and steadily increasing price on carbon, reaching $140 in 2040. The ETS will not reach that price level on its own, especially since the EU has been increasing fossil fuel subsidies. We therefore recommend reinforcing country- and sector-specific measures together with the ETS, in order to generate implicit and explicit carbon prices at a level compatible with EU climate ambitions. This paper also highlights the co-benefits of an auction reserve price, as it would bear a positive impact on sustainable development, economic 'green' growth, innovation, and Member State auctioning revenues in a predictable manner. More specifically, this paper shows that an auction reserve price would create rewarding opportunities to reduce emissions within ETS sectors while protecting ETS prices from external demand shocks and would not directly affect the secondary market. Implementing an auction reserve price within the EU ETS would serve as a reference level for other jurisdictions setting a price on CO₂ emissions