EU’s MSR will work best if it starts early, say researchers

Published 14:53 on February 16, 2015  /  Last updated at 14:49 on May 11, 2016  /  EMEA, EU ETS  /  No Comments

The MSR to regulate supply in Europe’s carbon market will perform best if introduced in 2017, according to researchers at 12 academic institutions in Europe, US and Australia.

The MSR to regulate supply in Europe’s carbon market will perform best if introduced in 2017, according to researchers at 12 academic institutions in Europe, US and Australia.

The research, led by the German Institute for Economic Research (DIW Berlin) and convened by Climate Strategies, backed the earlier 2017 start favoured by Germany and the UK over the 2021 date proposed by the European Commission.

The study is likely to be examined closely by lawmakers currently considering changes to the Commission’s MSR bill. Senior MEPs have proposed a compromise to introduce the MSR at the very end of 2018 to ease fears about harming industry via higher energy bills.

The researchers found that the MSR was justified as a policy intervention because it would help to correct market failures that have resulted in EUA prices dropping well below levels needed to ensure the bloc meets its long term emission goals at lowest cost.

They added that in all of their modelled scenarios the MSR would work better if introduced in 2017 rather than 2021 and if all allowances currently withheld from the market due to backloading are placed directly into the reserve.

“If the implementation of the Market Stability Reserve is delayed until 2021, we risk a lost decade for investments in modernization of energy intensive industries and the energy sector. All the models we ran indicate that the MSR should be introduced earlier than has been proposed. Bringing the start date forward to 2017 will significantly help the European Union stay on track with its efforts to switch to a low-carbon economy and reduce emissions,” said lead author Professor Karsten Neuhoff of DIW Berlin.

TRIGGER LEVELS

The report warned that the impact of the MSR could be drastically undermined if the prescribed amount of allowances in circulation needed to start filling or emptying the MSR are set incorrectly.

“Performance of a quantity-based MSR requires an understanding of the hedging demand and can be severely reduced with too high or low quantity trigger levels … if trigger levels are set too high the MSR will be in-effective, if they are set too low they can create some volatility,” the report said.

The Commission’s proposal envisages an upper trigger level of 833 million allowances in circulation to start filling the MSR and is designed to take into account utility hedging patterns.

Some business groups had raised concerns about how this figure had been determined by the Commission and whether this fixed level would take into account changing hedging practices.

But the report said it would only be important to gauge precise trigger levels from the early 2020s, when policymakers would be able to refine the trigger levels via the proposed review process using production data obtained under the EU’s REMIT Directive.

By Ben Garside – ben@carbon-pulse.com