Governing the energy transition through the EU carbon market as a complex adaptive system

This study analyzes the EU Emissions Trading System (EU ETS) as a Complex Adaptive System (CAS), moving beyond static economic models to trace its evolutionary trajectory through crises such as price collapses and the generation of windfall profits. By integrating risk society theory, institutional sociology, and system dynamics, the research models these early failures as the failure of a balancing feedback loop and the dominance of a pernicious reinforcing feedback loop. The study examines the system’s reflexive self-organization, particularly the implementation of the Market Stability Reserve (MSR) as an engineered balancing mechanism that enhances resilience. Applying Donella Meadows’ leverage points framework, the paper argues that the EU ETS has evolved by intervening at increasingly effective systemic levels—from parameter adjustments to reshaping core rules and goals. This evolution transforms the carbon market into a robust governance tool that drives renewable energy investment (SDG 7) and enforces emissions reductions (SDG 13), while mechanisms like the Social Climate Fund address the distribution of manufactured risks, ensuring a just transition. The analysis highlights how a well-functioning EU ETS mobilizes finance for low-carbon transitions and equitably distributes risks and benefits. This study provides a new paradigm for energy economics, demonstrating how framing the carbon market as a social risk distribution system offers a more robust model for governing complex energy systems and ensuring the social equity of the sustainable energy transition.