Credibility of the EU-ETS to decarbonize the European economy

The European Union aims at becoming the first carbon neutral economy by 2050. This aim is challenging for the cornerstone of the EU climate policy, the European Union Emission Trading System (EU-ETS). It more specifically questions the ability of the EU-ETS to induce long-term emission abatement in the form of investments in low-carbon technologies. This chapter discusses how regulatory uncertainty may impede regulated firms to make such investments. Its focus is more especially on the risk of time inconsistency. The chapter reviews different policy options to address the problem and argues in favour of a central bank of carbon as the more consistent and efficient solution.