Mechanisms to protect against formation of price bubble in EU ETS

Mechanisms to protect against formation of price bubble in EU ETS

Mechanisms to protect against formation of price bubble in EU ETS

On October 13, 2021, Robert Jeszke and Sebastian Lizak wrote a scientific article entitled “Reflections on the Mechanisms to Protect Against Formation of Price Bubble in the EU ETS Market“ The article is available on Sciendo.

The purpose of article is to examine whether the current legislative rules of the EU ETS protect against sudden EUA  price  fluctuation  and  the  risk  of  formation  of  a  price  bubble.  This  paper  tries  to  assess  the  potential  EUA  price bubble and to review of existing instruments within the EU ETS, analysing their efficiency using different assumptions and identify channels of possible other market instruments to efficiently prevent the carbon market instability  caused  by  rising  EUA  prices  and  market  speculation.  Authors  argue  that  the  European  Commission  does  not  currently  have  an  appropriate  market  instrument  to  respond  to  the  EUA  price  fluctuation.  Moreover,  there are some legislative loopholes in the system, which may encourage market speculators to influence EUA prices, and there is need to introduce better market safeguards.

There is no doubt that EUA prices are currently rising too high and too fast, making the EU ETS market extremely volatile. On one hand, this is unfavourable for EU ETS compliance entities, but on the other hand, it greatly benefits speculators, for whom extreme volatility means more money. The question is whether we really want to feed the speculators volatile EUA prices or whether we should instead strive to stabilise them. Participants in EU ETS compliance should receive some type of guarantee that when an extreme situation occurs in the market the EC has a transparent mechanism that can be triggered. Such a ‘safety valve’ would be indispensable for stabilising EU ETS participants, contributing to better planning of future investments. It seems that the European Commission currently has no such effective tools for stabilising prices. The mechanism in Art. 29a of the EU ETS Directive – which allows for 100 million allowances to be released from the Market Stability Reserve and auctioned in case of a sudden increase in EUA prices – cannot be called such a tool. It is practically impossible to trigger, given the current structure and problems with interpreting the provision. The next Market Stability Reserve review could be a great opportunity to introduce a price stabilising mechanism. One of the elements that should be considered is the possibility of opting out of EUA cancellation in the Market Stability Reserve after 2023 (an ‘invalidation mechanism’). These allowances may become valuable assets in the future when the market situation changes drastically and intervention is required. Among other solutions proposed by the authors are, e.g, faster functioning of the art. 29a of the EU ETS Directive mechanism, limiting the possibility of buying EUA’s by non-compliance entities, or introducing a special tax on transactions for speculators.

The article is available: DOI: https://doi.org/10.2478/oszn-2021-0005