Managing CO2 Price Uncertainty

As the European Commission prepares the next reform of the EU Emissions Trading Scheme (ETS), calls for greater control over the CO₂ price are gaining momentum. This is because uncertainty about its future development represents a major obstacle to investment in climate-friendly technologies. In his latest study, cep energy expert André Wolf warns of the unintended consequences of such interventions: “Attempts to intervene into price formation in the EU ETS I risk rising electricity prices and thus poorer investment conditions for key decarbonisation technologies,” emphasises Wolf. His model-based analysis shows that a successful industrial and climate policy must take greater account of the interdependence of CO₂ and energy markets.

Instead of intervening directly in price formation within the ETS, policymakers should reduce the risks of investing in climate-friendly technologies in a decentralised manner. Instruments such as Carbon Contracts for Difference or Green-Lead markets are particularly suitable. They distribute risks among investors, the state and other market players, thereby creating greater planning certainty. At the same time, price formation in the markets is maintained.

Providing a reliable and stable regulatory framework for emissions trading is likewise essential. In addition, technologies that make the energy system more flexible and reduce dependence on fossil power generation should be promoted. This can reduce both electricity and CO₂ price uncertainty in the long term.