ETCLIP – The Challenge of the European Carbon Market: Emission Trading, Carbon Leakage and Instruments to Stabilise the CO2 Price. Price Volatility in Carbon Markets: Why it Matters and How it Can be Managed
AbstractThe environmental effectiveness of an emission trading system depends on the one hand on the stringency of the cap and on the other hand on the scheme's ability to provide stable regulatory conditions and incentives for investment in emission saving technologies. However, in case of highly volatile CO2 prices no clear investment signal is provided and hence firms' decision making and planning is rendered difficult. Analyses of price developments in the European Emission Trading Scheme (EU ETS) indicate that in Phase 1 (2005-2007) fluctuations were mainly caused by incomplete information at the beginning, adjustments after the emergence of verified emission data and regulatory mechanisms. At the beginning of Phase 2 (2008-2012) in contrast a decline in carbon prices was observed as firms sold surplus allowances resulting from lower emissions due to economic recession. For Phase 3 of the EU ETS (2013-2020) hence the introduction of price stabilisation measures has been suggested by several member countries during the discussions on the EU energy and climate package. Various instruments can be integrated in a cap-and-trade scheme in order to reduce price volatility such as provisions for banking and borrowing, the approval of offsets for compliance purposes and hybrid systems, i.e., combinations of price and quantity mechanisms. Given the long-term nature of climate policy, the related uncertainties regarding technological change and political frameworks, and given a rising speculation in carbon markets, such price stabilisation approaches should be considered for the future design of emission trading schemes.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by WIFO in its series WIFO Working Papers with number 409.
Length: 25 pages
Date of creation: 09 Nov 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-ENE-2011-12-13 (Energy Economics)
- NEP-ENV-2011-12-13 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Claudia Kettner & Daniela Kletzan-Slamanig & Angela Köppl, 2011. "The EU Emission Trading Scheme. Allocation Patterns and Trading Flows," WIFO Working Papers 402, WIFO.
- Stavins, Robert, 2007.
"Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System,"
Working Paper Series
rwp07-053, Harvard University, John F. Kennedy School of Government.
- Robert N. Stavins, 2008. "Addressing climate change with a comprehensive US cap-and-trade system," Oxford Review of Economic Policy, Oxford University Press, vol. 24(2), pages 298-321, Summer.
- Robert N. Stavins, 2008. "Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System," Working Papers 2008.67, Fondazione Eni Enrico Mattei.
- Stavins, Robert N., 2007. "Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System," Working paper 456, Regulation2point0.
- Burtraw, Dallas & Palmer, Karen & Krupnick, Alan & Evans, David & Toth, Russell, 2005. "Economics of Pollution Trading for SO2 and NOx," Discussion Papers dp-05-05, Resources For the Future.
- Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
- Chevallier, Julien, 2011.
"Detecting instability in the volatility of carbon prices,"
Elsevier, vol. 33(1), pages 99-110, January.
- Chevallier, Julien, 2011. "Detecting instability in the volatility of carbon prices," Economics Papers from University Paris Dauphine 123456789/5110, Paris Dauphine University.
- Martin L. Weitzman, 1977.
"Is the Price System or Rationing More Effective in Getting a Commodity to Those Who Need It Most?,"
Bell Journal of Economics,
The RAND Corporation, vol. 8(2), pages 517-524, Autumn.
- M. L. Weitzman, 1974. "Is the Price System or Rationing More Effective in Getting a Commodity to Those Who Need It Most?," Working papers 140, Massachusetts Institute of Technology (MIT), Department of Economics.
- Grüll, Georg & Taschini, Luca, 2011. "Cap-and-trade properties under different hybrid scheme designs," Journal of Environmental Economics and Management, Elsevier, vol. 61(1), pages 107-118, January.
- Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
- Peter John Wood & Frank Jotzo, 2009.
"Price Floors for Emissions Trading,"
2009.118, Fondazione Eni Enrico Mattei.
- Wood, Peter John & Jotzo, Frank, 2009. "Price Floors for Emissions Trading," Research Reports 94885, Australian National University, Environmental Economics Research Hub.
- Peter Wood & Frank Jotzo, 2009. "Price Floors for Emissions Trading," Environmental Economics Research Hub Research Reports 0936, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
- Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
- Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2010.
"A symmetric safety valve,"
Elsevier, vol. 38(9), pages 4921-4932, September.
- Wilfried Rickels & Dennis Görlich & Gerrit Oberst, 2010. "Explaining European Emission Allowance Price Dynamics: Evidence from Phase II," Kiel Working Papers 1650, Kiel Institute for the World Economy.
- Hintermann, Beat, 2010.
"Allowance price drivers in the first phase of the EU ETS,"
Journal of Environmental Economics and Management,
Elsevier, vol. 59(1), pages 43-56, January.
- Beat Hintermann, 2009. "Allowance Price Drivers in the First Phase of the EU ETS," CEPE Working paper series 09-63, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Pizer, William & Newell, Richard & Zhang, Jiangfeng, 2003.
"Managing Permit Markets to Stabilize Prices,"
dp-03-34, Resources For the Future.
- Warwick J. McKibbin & Peter J. Wilcoxen, 2002. "The Role of Economics in Climate Change Policy," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 107-129, Spring.
- Fell, Harrison & Morgenstern, Richard, 2009.
"Alternative Approaches to Cost Containment in a Cap-and-Trade System,"
dp-09-14, Resources For the Future.
- Harrison Fell & Richard Morgenstern, 2010. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(2), pages 275-297, October.
- Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
- Tatsutani, Marika & Pizer, William A., 2008. "Managing Costs in a U.S. Greenhouse Gas Trading Program: A Workshop Summary," Discussion Papers dp-08-23, Resources For the Future.
- Murray, Brian C. & Newell, Richard G. & Pizer, William A., 2008.
"Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade,"
dp-08-24, Resources For the Future.
- Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
- Brian C. Murray & Richard G. Newell & William A. Pizer, 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," NBER Working Papers 14258, National Bureau of Economic Research, Inc.
- Michael Hanemann, 2010. "Cap-and-trade: a sufficient or necessary condition for emission reduction?," Oxford Review of Economic Policy, Oxford University Press, vol. 26(2), pages 225-252, Summer.
- Claudia Kettner & Angela Köppl & Stefan Schleicher, 2010. "The EU Emission Trading Scheme. Insights from the First Trading Years with a Focus on Price Volatility," WIFO Working Papers 368, WIFO.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ilse Schulz).
If references are entirely missing, you can add them using this form.