Document summary
The EU-ETS is the only commodity market in the world where demand varies in real time but supply is fixed years in advance. To the extent that the ETS is designed not only to reduce emissions in line with the EU’s 2020 target, but also to generate a long-term price signal to incentivize low-carbon investment, this seriously impedes its effectiveness. This report argues that without the promise of structural reform the most likely default outcome will be an EU-wide dash for gas over the second half of this decade, with implications for (i) the EU’s long- term emissions trajectory, (ii) its security of supply, and (iii) the efficiency of EU power markets. In other words, there will likely be an over-reliance on gas for new generation capacity, and a need for costly complementary measures in any Member State wanting to incentivize low-carbon generation.