Influence of market structures and market regulation on the carbon market

Emissions Trading Systems (ETSs) are common instruments to reduce greenhouse gas (GHG) emissions in the fight against global climate change. ETSs aim to create a scarcity price by limiting the quantity of greenhouse gas allowances, thereby generating a change in consumption, production, and investment decisions. This price signal makes low-emission products and services more attractive and ultimately drives innovation. For an ETS to achieve emission reductions at the lowest possible price, a free market is required that provides uniform and undistorted price signals to all economic decision-makers and market participants.

Experiences with existing ETSs show that confidence in the carbon market supports the efficiency of the instrument. The system must also be aligned with sectoral regulations in order to function optimally. How market-based carbon pricing mechanisms interact with energy markets is particularly relevant for the electricity sector, which accounts for a major share of global CO2 emissions, is covered by nearly all existing ETSs, and features complex market regulations.

This project analysed the interdependencies between electricity market structures and regulations and carbon markets. adelphi, as project lead, worked together with Öko-Institut e.V. and Züricher Hochschule für Angewandte Wissenschaften (ZHAW) to develop a conceptual framework that identified drivers and barriers to allowance trade in primary and secondary markets (as pertaining to liquidity, price formation and price volatility), and to emissions abatement in the electricity sector (as pertaining to incentives for low-carbon production, investment and consumption).

Subsequently, the consortium applied the framework to case studies in California, China, the European Union, Mexico and South Korea. The results were discussed with regional stakeholders in expert workshops and webinars and brought together in a synthesis report. Throughout the project, adelphi and the consortium supported knowledge sharing activities regarding the influence of electricity market structures and regulations on the effectiveness of ETSs in reducing emissions from the sector.