EU ETS POST 2012 SUBMISSION TO THE EU REVIEW

The submission argues that the EU ETS is the only credible mechanism for a common carbon price in Europe but requires reform post-2012 to be effective. The authors advocate for a shift from free allocation to auctioning to remove investment distortions and 'early action' problems. To protect low-carbon investments from price volatility, they suggest reserve prices for auctions or put options. While acknowledging carbon leakage, the report asserts it only affects a few specific sub-sectors—such as semi-finished steel and clinker—and suggests that border adjustments or sectoral agreements are preferable to free allocations, which are viewed as a second-best, temporary option.

• A carbon price is necessary but not sufficient for emission reductions, which also require innovation, optimisation, and substitution in industrial processes. The EU ETS is identified as the only credible way to establish a common carbon price across Europe.
• Free allowance allocation creates several distortions, including the 'early action problem' where firms deviate from efficient investment to influence future allocations, and subsidies for carbon-intensive plants that delay decarbonisation.
• To protect investors from extremely low price scenarios and reduce investment uncertainty, the authors propose using a reserve price on EU ETS auctions or issuing put options on future allowances.
• Carbon leakage is likely only a concern for a small number of specific sub-sectors: semi-finished steel (BOF), clinker, lime, and potentially pulp, ammonia, and basic organic chemicals from steam cracking.
• The total economic value-added of sectors exposed to leakage is estimated to be no more than 1% of EU GDP, suggesting that competitiveness losses could be kept to a trivial magnitude with successful measures.
• The authors recommend that free allocation be greatly reduced, potentially to zero, and that the EU Directive specify a minimum rather than a maximum level of auctioning by Member States.
• Border adjustments are presented as a technically and legally feasible option to compensate for differential carbon prices, though they are noted as being politically and institutionally challenging.

APA

Neuhoff, K., Grubb, M., Hourcade, J.-C., & Matthes, F. (2007). EU ETS POST 2012 SUBMISSION TO THE EU REVIEW. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/cs-submission-eu-review-fin-070706.pdf

Chicago

Neuhoff, Karsten, Michael Grubb, Jean-Charles Hourcade, and Felix Matthes. EU ETS POST 2012 SUBMISSION TO THE EU REVIEW. Climate Strategies, 2007. https://climatestrategies.org/wp-content/uploads/2014/11/cs-submission-eu-review-fin-070706.pdf.

Wikipedia

{{cite press release |last1=Neuhoff |first1=Karsten |last2=Grubb |first2=Michael |last3=Hourcade |first3=Jean-Charles |last4=Matthes |first4=Felix |title=EU ETS POST 2012 SUBMISSION TO THE EU REVIEW |publisher=Climate Strategies |date=6 July 2007 |url=https://climatestrategies.org/wp-content/uploads/2014/11/cs-submission-eu-review-fin-070706.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@misc{neuhoff2007ets, author = {Neuhoff, Karsten and Grubb, Michael and Hourcade, Jean-Charles and Matthes, Felix}, title = {{EU ETS POST 2012 SUBMISSION TO THE EU REVIEW}}, publisher = {Climate Strategies}, year = {2007}, month = jul, url = {https://climatestrategies.org/wp-content/uploads/2014/11/cs-submission-eu-review-fin-070706.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }