Rebasing the EU ETS Phase 4 cap
Sandbag’s report on Phase 4 reform of the ETS proposes that the Phase 4 EU ETS cap should be realigned to match the reality of emissions in 2020, preferably accompanied by an increase in the Linear Reduction Factor:
In 2015 emissions covered by the EU ETS were already below the level of the cap for 2020. By 2020 emissions look likely to be over 10%, and perhaps much more, below the cap at the end of Phase 3, which was set in 2010 and so fails to reflect current realities. This will lead to additional surplus allowances generated throughout Phase 4;
A simple adjustment to bring the cap at the start of Phase 4 in line with the reality of emissions would go a long way towards solving this problem by reducing the Phase 4 cap, likely by around 2 billion tonnes or more over the 10 years of the phase;
Aligning the cap with actual emissions tightens the cap more quickly and more effectively than changes to the Linear Reduction Factor (LRF).