The rise from collapse to market discipline
The EU Emissions Trading System launched in 2005 with a giveaway: most allowances were freely allocated to incumbents, creating a glut. The carbon price crashed to near zero, signaling no scarcity and no incentive to abate. A 2018 reform tightened caps and shifted allocation toward auctioning, letting scarcity drive price upward. By 2020, COVID suppressed emissions temporarily, but recovery and stricter targets pushed prices past 50 EUR/ton, then to 80+ by 2024.
Price volatility and its policy drivers
ETS prices swing with economic forecasts (recessions reduce demand, lowing prices) and policy announcements (stricter cap targets or stricter phase-in timelines spike prices). A high price reduces emissions across the board but also pressures industry and consumers. Some argue price floors are needed to prevent speculative collapses; others worry floors destroy the price-discovery mechanism that makes trading efficient. The EU has experimented with both: price supports and temporary supply adjustments to manage shocks.