European Union regulators should avoid overlapping policies as a matter of principle, to protect the market effectiveness of the EU Emissions Trading System, according to a reflection note from IETA.
In recent months, there has been considerable discussion into the impact of unilateral policies, such as carbon floor prices and taxes on coal consumption in EU member states.
National policies often overlap and/or conflict with EU-level regulation. More specifically, these policies have a significant impact on the supply and demand in the EU market, on the functioning of the EU ETS and on efforts on decarbonisation across Europe. They also encourage a fragmented approach to EU climate action that, in turn, creates intra-EU distortions.
“Emissions trading has the lowest cost per tonne of CO2e abated compared to other types of regulation. As such, it should be the preferred option to decarbonise the economy in the most cost-effective way,” IETA wrote.
Moreover, often the impact of national and unilateral measures on the EU ETS is not adequately taken into account. Therefore, greater transparency is needed on whether such policies contribute to turning the EU ETS into a residual policy instrument as emission reductions in the ETS sectors would be achieved not through a well-functioning ETS, but as a consequence of other national policies and regulations, associated with higher costs per tonne of CO2e abated.
IETA recommends that policy overlap should be avoided wherever possible. To achieve greater transparency, national policies and measures should, as a minimum, be subject to an analysis of their impact on the system, in terms of potential additional emission reductions that they might create, the intra-EU distortions they might cause, and any potential additional costs for achieving such reductions compared to what would have been the case with the EU ETS only.