Important points here but describing the European approach as a central carbon bank is inaccurate. There are actually critical differences between EU’s Market Stability Reserve (which I advised on) and a central bank (which by the way, EU lawmakers specifically did not want). https://twitter.com/drvolts/status/1339991008814063616

A central bank suggests that a central agency has discretion over the market and seeks a specific price level. Sure, you could argue the EU periodically reviews the system and that price expectations are part of the discussion, but there is no target price level or guarantee.

Instead the Market Stability Reserve is an automatic, quantity-based, adjustment mechanism that withdraws or releases CO2 permits based on pre-defined rules. I’ve previously described it as a de facto soft price-floor-and-ceiling, the emphasis being on soft.

The idea is that the market is being let to determine the price but that there are certain guardrails that prevent the market from accumulating too many permits if, for instance, other policies reduce emissions more than expected.

So, as an example of the messiness of policy, it’s trying to be the best of both worlds - a market-determined CO2 price that is still somewhat stable, but not very stable, which is its weakness. There is no guarantee of stability as there would be with a central bank.

Still though, it’s a huge improvement on the plain vanilla carbon market design precisely because it allows other policies to reduce emissions, which @drvolts and @dcullenward talk about, without those reductions to be offset somewhere else within the cap. Ok that’s my rant.