A cap-and-trade system that fixes total emissions and lets the market discover their price, turning a constraint into a line in the accounts.
The European carbon market sets a declining cap of emission allowances for covered installations, principally power generation, heavy industry and intra-European aviation, and lets participants trade them. The mechanism is efficient by construction, since abatement happens where it costs least, and most of its history is the correction of an initial flaw: allowances were too numerous and too freely handed out for a decade, leaving a price too low to weigh on any investment decision. The market stability reserve, by mechanically withdrawing surpluses, corrected that point and made the price meaningful. For insurance the system produces three distinct exposures: a transition risk on insured industrial assets, whose operating costs now depend on a volatile price; a liability and fraud risk on the registries, which have already suffered allowance theft; and a new class of insurable subject matter, covering surrender obligations where an installation is halted by an accident.
The emissions trading system established by Directive 2003/87/EC was completed by a market stability reserve operating since 1 January 2019, which withdraws surplus allowances from circulation under an automatic rule.
EU ETS, SEQE-UE, système d'échange de quotas, emissions trading system