The EU ETS as an Environmental Instrument - Green Energy and Efficiency: An Economic Perspective - page 356

Fig. 1 Historical EUA front dec settlement price. Source own work based on Bloomberg data

However, the economic situation changed and economic activity slowed down 9
so that year by year an enormous surplus of allowances was created in the market.
That resulted in a drastic fall in carbon prices and became a concern for legislators.
Legislators seek a robust price signal as an incentive to reduce emissions. However,
as policymakers do not have enough information on the marginal cost of CO 2
emission reduction in different sectors, at exceptionally low prices such as those
prevailing in 2013 there is no guarantee that the carbon price is triggering any
reduction actions or new investment.
In the case of the ETS, these basics play as in any other carbon market. How-
ever, there are a number of factors quite speci

c to this market during this period

(2008 - 2013) which have played a key role in carbon price dynamics. Intrinsic and

speci c factors of this market have decisive impacts on price, with their own

dynamics (Fig. 1 ).
Unilateral and single-country decisions about internal energy policies strongly
affect how much CO 2 is emitted (CO 2 demand) but have no impact on the number
of total allowances available on the market. This imbalance in demand and supply

9 In the case of the EU ETS this issue has played a major role in the plummeting of carbon prices.
Production grew between 2003 and 2007 by almost 3 % per annum, but decreased by nearly 2 %
per annum from 2008 to 2012. Therefore, demand for allowances substantially decreased. As
Egenhofer et al. [ 6 ] mention: At the time of the hard-won compromise of the ETS review for post-

2012, there was a general conviction that the new ETS would be

“

, i.e. be able to cope
with the temporary lack of a global climate change agreement and address competitiveness, yet
able to drive decarbonisation of the EU economy. The 2008

' future-proof '

2009 economic crises, however, has
destroyed that con dence by a seemingly permanent dramatic lowering of EUA prices due to a
rapid and dramatic decline in economic output. Ever since, EUA prices have been lingering below
€

-

2. Without political intervention, EUA prices are not
expected to climb much higher throughout the period of up to 2020, largely because of the
possibility to bank unused allowances between the second and third phase ” .

5 per tonne of CO 2 , going as low as around €