Jean-Michel Charpin, an expert of French government's finances, has been tasked to lead a mission on European Commission’s proposed reform. He will deliver suggestions about the French climate plans for 2030 at the end of February.
The stability of the carbon market is “essential”, Charpin said, stressing that the current CO2 prices of around €5 a tonne “are not satisfactory”.
“There is a consensus on the subject. And the solutions are not simple,” the official said.
Another team of academics lead by Christian de Perthuis from the Climate Economics Chair at Paris Dauphine University issued a “policy brief” on the Commission’s 2030 climate proposal.
But the proposal to create “reserve” quotas aimed at stabilising the carbon market was questioned by the researchers at Paris Dauphine University, who said it could generate “greater volatility” and prove “detrimental to a clear price signal”.
‘Robot’ to regulate carbon prices
Thanks to an econometric model called Zephyr, the university researchers analysed in detail the proposals put forward by the EU executive.
The good news is that the mechanism could push prices up – at least as of 2021.
Indeed, by then, industrial installations covered by the EU’s carbon trading system are expected to see their maximum annual carbon allocations decrease significantly. Between 2005 and 2030, the 12,000 industrial sites covered by the scheme will have to decrease their CO2 emissions by 43%.
The bad news is that the “stability” mechanism could be a source of further volatility, the researchers found.
The Commission’s proposed system is not simple: it assesses via a “robot” the number of quotas still in circulation but which have remained unused since the carbon market was launched in 2008. Depending on the market liquidity, a maximum and minimum amount (ceiling and floor) would trigger the stopping or release of quotas.
Even though the idea seems valid, achieving it in practice is more complex, notably because the proposed mechanism is designed to push up prices rather than to lower them (by removing quotas from the market).
The fact that the proposed system “removes quotas more easily than it injects them” would, according to the researchers, be a source of price volatility, which is never appreciated by industrial stakeholders who stress the need for long-term market visibility.
‘A masterpiece of Brussels technocracy’
Ultimately, the Zéphyr model delivers two main scenarios: either there is a strong price increase, in which a tonne of carbon reaches €50 in 2021, or a more erratic scenario with a peak in 2021 and a decline thereafter.
In both cases however, the mechanism is expected to cause high volatility. And even if the system is launched in 2021, a first assessment is not planned before 2026, the authors stress.
The issue which creates concerns among the economists is that reserve “behaves like a robot that does not take into account the reactions of economic agents to the changes in their environment.”
“This project is a masterpiece of Brussels technocracy,” said Christian de Perthuis, the scientific director of the Climate Economics Chair at Paris-Dauphine University.
France floats carbon ‘central bank’ idea
The European Commission has organised several expert group meetings to design its carbon market reform and the idea of establishing a stability reserve was raised during one of those, in March 2013.
“Many stakeholders have been seduced by this approach. Another group of experts met in October 2013 to discuss the technical aspects,” the EU Commission says, arguing that the mechanism was independent and good.
“Under the proposed legislative package today, the reserve fully operates according to predefined rules that leave no discretion to the Commission or member states regarding its implementation,” says the Commission's climate directorate (DG Clima).
The debate is expected to continue ahead of a summit in March, when EU leaders will discuss the 2030 climate package.
Rather than entrusting the management of the carbon market to a robot, France is favourable to establishing a genuine “central bank for carbon” which could manage the carbon market like a currency.
“It’s been one of the topics of discussion but the mission continues and no conclusion is adopted at the time being,” Charpin cautioned.