Static, not dynamic:
Our model simulates first the Commission’s proposal, and then allows adjustments to show how each Amendment affects how the Reserve works, and how quickly the surplus is removed. Crucially, our model is not dynamic: it uses fixed emissions projections. However, in reality the point of the ETS is to change the behaviour of those covered in the scheme, and so we would expect that as there were less allowances available, companies would begin to switch to more efficient fuels and methods of production. Bear this in mind, particularly out towards 2030, where this could begin to have a major effect on emissions.
Different emissions projections:
Key to whether the MSR works to bring down the surplus is the future projection for EU emissions. The Commission’s proposal assumes growing electricity use, and so higher emissions, which would eat into some of the surplus. Sandbag’s research shows that electricity use has been dropping since 2010 even as the economy grows, and we believe steeper drops are to come. Under our projections, the MSR would have to work much harder to control the surplus that we foresee developing. The UK government makes different calculations again, sitting between the Commission and Sandbag projections. Sandbag’s projection is unique in factoring in the unused allowances we believe are going to return to the market in 2010, including the remainder from partial cessation rules. These allowances currently total a similar volume to the backload, but the Commission believes they will be used up by 2020. We at Sandbag are not so sure.
Price response:
Though the current glut of allowances is clearly responsible for the crash in the carbon price, modelling how the carbon price would change if the surplus was tackled is a very difficult art. Sandbag are currently working on price forecasts for different levels of surplus, and we hope to incorporate this into the model soon.
We will continue to add new features to the model, including new options as they are suggested in the Parliament.
We are continually updating this tool.