How to make the carbon offsets mechanism work in the current phase of the EU ETS?: A model-based analysis

Massively reducing Greenhouse Gas (GHG) emissions is one of the biggest challenges of the 21th century. An important deployment of Renewable Energies (RE) can be a key element in attaining this objective. Setting a (high) carbon price would greatly help as it would send a powerful signal to RE investors that it is time to switch from high-emitting firms to free-emitting ones. Carbon pricing is implemented through the setting of either a carbon tax or an Emissions Trading Scheme (ETS). The European Union (EU) implemented its own ETS, the EU ETS, in 2005. Since then however, it faced low permit prices (partly due to an oversupply of both carbon permits and carbon offset credits), which raises a crucial question: how could the EU ETS and its carbon offsets market be improved to generate higher permit prices, thus promoting RE investment? Two policy measures seem relevant today: implementing a floor price for permits (not examined in this work) and/or modifying the rules of the carbon offset credits market of the EU ETS. This master thesis will focus on offsets policy instruments the EU ETS could implement, drawn from a paper published by Bento et al. (2015), that aim at better designing its carbon offsets market and resulting in a higher permit price. The policy instruments analyzed are: stricter baselines, trade ratios and limits. This work will then discuss the efficiency (in regard to society welfare optimization) of these measures.