Optimal allocation of the EU carbon budget: A multi-model assessment

The European Union (EU) has pledged to reduce greenhouse gas (GHG) emissions until the year 2030 by 55% compared to 1990. Recently, the EU institutions decided to introduce a new Emission Trading System for road transport, buildings and fuels for additional sectors (ETS2) in addition to the current EU ETS. Contested design features were the split of the carbon budget between the EU ETS and the remaining sectors regulated under the Effort Sharing Regulation (ESR), and the carbon price level of the ETS2. Conducting a multi-model assessment, we find that the agreed allocation of the carbon budget between EU ETS and ESR sectors seems almost optimal from an economic efficiency point of view. We also find that if carbon prices are the only instruments used, the prices necessary to reach the emission targets range from 130 to 286 euro/tCO2 in the EU ETS and from 175 to 360 euro/tCO2 for the energy-related ESR (ESR-E) emissions - depending on technology development and baseline assumptions of the different models. Our results imply that when the ETS2 price does not go above the "indicative cap" of 45 euro/tCO2, the abatement target will not be reached with a carbon price alone. The remaining abatement needs to come from complementary policies like technology standards or subsidies. As abatement costs from these policies are above 45 euro/tCO2, effective costs for consumers could well exceed the costs of carbon pricing alone due to inefficiencies that arise from the lack of flexibility to mitigate emissions where it is cheapest.