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Too early to celebrate: What markets tell us about the credibility of the Paris climate agreement

The price of carbon emissions has decreased markedly since the first draft of the Paris Agreement has been released. The decrease in the price of futu

Publishing date
15 December 2015

The Paris Climate Conference COP21 has just ended and the Parties have found an agreement, approving the final draft of the Paris Agreement on Saturday morning. We would expect that a strong agreement should eventually lead to a reduction in greenhouse gas (GHG) emissions so as to reach the climate goals of limiting temperature increases to below 2°C. One of the main instrument that national and European governments have to trigger the necessary investments in renewables and green energy is the price of CO2 emissions. In the EU, this price is given by the emission trading system (ETS). A deal that would strengthen European efforts to limit GHG emissions should lead to an increase in prices for ETS certificates as companies want to buy permissions for future emissions at the currently low price.

The figure below shows the price of ETS certificates. The price of carbon emissions has decreased markedly since the first draft of the Paris Agreement has been released. The decrease in the price of futures is the largest observed over the last two months.  This suggests that companies do not believe that more constraints will be put on them in the future as a result of the deal. On the contrary, market participants take the deal as a signal that there will be less reductions in available certificates in the future. Overall, this suggest that the credibility of the climate deal is still low. To trigger significant private investment in renewable energy, European policy makers will have to step up their game and increase the credibility of the governance of their CO2 reduction goals.


About the authors

  • Guntram B. Wolff

    Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Public Policy and Economics at the Willy Brandt School of Public Policy. From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

    An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, Business Insider ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and  advisory board of Elcano.

    Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media. 

  • Domenico Favoino Favoino

    Domenico Favoino, an Italian citizen, currently worked at Bruegel in 2016 as a Research Assistant in the Energy and Climate Policy area in the micro team. Prior to this, heworked as a research assistant at Bocconi University, in the Department of Policy Analysis and Public Management; in particular, he has been involved in a research project regarding firms' markups, productivity and financial capability. Moreover, he worked as a trainee at the European Commission - DG COMP, Office of Principal Advisor, focusing on ex-post economic evaluation of competition policies on energy markets. He holds a Master's degree in Economics and Social Sciences from Bocconi University in Milan.

    In his Master's thesis, Domenico made an empirical test of a model of monopolistic competition and trade on European firm-level data, involving the structural estimation of productivity and markup of firms.

    His research interests include International Trade, Empirical Industrial Organization and Energy and Climate Policy.

    He is fluent in English and Italian.

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