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Policy interactions, risk and price formation in carbon markets

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  • Blyth, William
  • Bunn, Derek
  • Kettunen, Janne
  • Wilson, Tom
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    Abstract

    Carbon pricing is an important mechanism for providing companies with incentives to invest in carbon abatement. Price formation in carbon markets involves a complex interplay between policy targets, dynamic technology costs, and market rules. Carbon pricing may under-deliver investment due to R&D externalities, requiring additional policies which themselves affect market prices. Also, abatement costs depend on the extent of technology deployment due to learning-by-doing. This paper introduces an analytical framework based on marginal abatement cost (MAC) curves with the aim of providing an intuitive understanding of the key dynamics and risk factors in carbon markets. The framework extends the usual static MAC representation of the market to incorporate policy interactions and some technology cost dynamics. The analysis indicates that supporting large-scale deployment of mature abatement technologies suppresses the marginal cost of abatement, sometimes to zero, whilst increasing total abatement costs. However, support for early stage R&D may reduce both total abatement cost and carbon price risk. An important aspect of the analysis is in elevating risk management considerations into energy policy formation, as the results of the stochastic modelling indicate wide distributions for the emergence of carbon prices and public costs around the policy expectations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 37 (2009)
    Issue (Month): 12 (December)
    Pages: 5192-5207

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    Handle: RePEc:eee:enepol:v:37:y:2009:i:12:p:5192-5207

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    Web page: http://www.elsevier.com/locate/enpol

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    Keywords: Carbon markets Low-carbon technology Risk;

    References

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    Cited by:
    1. Zhao, Yong & Tang, Kam Ki & Wang, Li-li, 2013. "Do renewable electricity policies promote renewable electricity generation? Evidence from panel data," Energy Policy, Elsevier, vol. 62(C), pages 887-897.
    2. Chevallier, Julien, 2011. "Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models," Economic Modelling, Elsevier, vol. 28(6), pages 2634-2656.
    3. Blyth, William & Bunn, Derek, 2011. "Coevolution of policy, market and technical price risks in the EU ETS," Energy Policy, Elsevier, vol. 39(8), pages 4578-4593, August.
    4. Chevallier, Julien, 2011. "A model of carbon price interactions with macroeconomic and energy dynamics," Economics Papers from University Paris Dauphine 123456789/6969, Paris Dauphine University.
    5. Patrick Hamshere & Liam Wagner, 2012. "Potential Impacts of Subprime Carbon on Australia’s Impending Carbon Market," Energy Economics and Management Group Working Papers 14, School of Economics, University of Queensland, Australia.
    6. Anne Schopp & Karsten Neuhoff, 2013. "The Role of Hedging in Carbon Markets," Discussion Papers of DIW Berlin 1271, DIW Berlin, German Institute for Economic Research.
    7. Nemet, Gregory F., 2010. "Robust incentives and the design of a climate change governance regime," Energy Policy, Elsevier, vol. 38(11), pages 7216-7225, November.
    8. Laude, Audrey & Jonen, Christian, 2013. "Biomass and CCS: The influence of technical change," Energy Policy, Elsevier, vol. 60(C), pages 916-924.
    9. Audrey Laude & Christian Jonen, 2011. "Biomass and CCS: The influence of the learning effect," Working Papers halshs-00829779, HAL.
    10. Audrey Laude, 2011. "Uncertainty about long term climate targets: A real option approach to investment appraisal," Working Papers halshs-00829667, HAL.
    11. Derek Lemoine & Sabine Fuss & Jana Szolgayova & Michael Obersteiner & Daniel Kammen, 2012. "The influence of negative emission technologies and technology policies on the optimal climate mitigation portfolio," Climatic Change, Springer, vol. 113(2), pages 141-162, July.

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