CO2 emissions trading in the EU: Models and policy applications

Over the past decade, several CO2 emissions trading schemes have been introduced around the world. The first, and by far largest scheme, is the European Union Emissions Trading Scheme (EU ETS). Despite early hopes that the scheme could seriously trigger investments in greenhouse gas reduction technologies around Europe, its ability to do so has fallen far below prior expectations. Policymakers now face the challenging task to revitalize the EU ETS and bring its ability to trigger investment in line with policy objectives. In this thesis, we take a closer look at the performance drivers of the EU ETS by developing a dynamic stochastic simulation model of the scheme. Based on the analysis with that model, we offer several policy recommendations that can help to align the EU ETS performance more closely with the policy objectives of the EU and its individual member-states. First, we take the perspective of potential investors in Carbon Capture and Storage (CCS) to assess to what extent the EU ETS is able to structurally trigger investments in such capital intensive technologies with a high lead time. We test the impact of both the current EU ETS design, as well as amended designs, on the scope for investments in CCS. Subsequently, we examine to what extent the performance of the EU ETS incentive is affected by instruments that have been introduced in parallel to the scheme