Climate Economics with Arvid Viaene
A research-focused podcast on the economics of climate change and air pollution. Episodes are released every two weeks on Tuesday at 6 am CET. Episodes will be either expert interviews or solo explorations of key issues. Hosted by Dr. Arvid Viaene, a climate economist with a PhD from the University of Chicago. He has done research on the impacts of climate change on agriculture and mortality. His research on climate-related mortality has been published in The Quarterly Journal of Economics, and he has advised the European Commission on the impacts of climate policy on firm competitiveness.
Climate Economics with Arvid Viaene
#26 Dr. Edwin Woerdman - The EU ETS in 2026: MSR, Economic (In-)Efficiencies and What Might Change
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This is Part 2 of my conversation with Professor Edwin Woerdman on the EU ETS. In Part 1, we covered the core mechanics of cap-and-trade—and why “2039” is an arithmetic consequence of the linear reduction factor.
In Part 2, we tackle the moving part that keeps returning to headlines whenever prices move: the Market Stability Reserve (MSR)—which Edwin calls the ETS “vacuum cleaner.” We discuss why it was created, how it changes auction supply, why its cancellation rules matter, and why the Commission is now reconsidering parts of it in the current energy and geopolitical context.
We also go beyond “ETS 101” and talk about where real design frictions show up:
- How the MSR works, and why it can affect expectations and price dynamics
- Why a positive carbon price can persist even with a surplus (forward-looking firms)
- Why free allocation is not a problem in economic theory (opportunity costs)
- Where the EU ETS deviates from the economic “first best,” including output-based free allocation and administrative burden
- What kinds of tweaks might realistically appear in the 2026 review (and why many changes are incremental)
Note that Professor Woerdman recently published a paper explaining a lot of what we cover in more detail. You can find the paper here: Woerdman, E. and Kotzampasakis, M., 'EU Emissions Trading System' (April 01, 2026), EU Climate Mitigation Law, Cheltenham: Edward Elgar Publishing, forthcoming 2027. Available at SSRN: https://ssrn.com/abstract=6633238 or http://dx.doi.org/10.2139/ssrn.6633238
Up next: if you want to apply this toolkit to what’s happening right now in EU policy, the next episode with Jos Cozijnsen digs into current discussions, the 2040 targets, the MSR reform, and proposals around price controls.
For questions, comments or suggestions, you can contact me at arvid.viaene.ce@gmail.com