Policy options to improve the effectiveness of the EU emissions trading system: A multi-criteria analysis

This paper considers several policy options which have been proposed to improve the functioning of the ETS. These options require an intervention either on the ETS cap (−30% target, set-aside, carbon central bank, long-term target) or on the carbon price (European and national price floor). We analyse the impact of each policy on the ETS carbon price and emissions. A multi-criteria evaluation method is applied to compare the policy options against a plurality of environmental, economic and procedural criteria. We find that the final ranking depends on the goals to be achieved, i.e., the relative weights attributed to the criteria. When policymakers want mainly to support the carbon price both in the short and long-run, while improving ETS flexibility and harmonization, the CCB and the EU price floor are, respectively ranked as first and second-best options. As the preference for environmental and implementation goals gradually increases, the position of the EU price floor and CCB options tend to invert. The −30% target should be adopted when reducing emissions is the priority goal, while a national price floor is the worst option, in this case. Nevertheless, self-interested States looking for a relatively quick, feasible solution, may find it optimal.

► A multi-criteria analysis is adopted to compare policy options to improve the ETS effectiveness.
► An ETS cap reversible adjustment by a carbon central bank is the first-best option.
► The establishment of a EU-wide price floor would represent a second-best solution.
► A national price floor is the worst option but self-interest states may find it optimal.
► A post-2020 target is not a mutually exclusive option and should be set.