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Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View

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  • Jotzo, Frank
  • Hatfield-Dodds, Steve

Abstract

The merits of floor prices in emissions trading schemes (ETS) depend on the problem addressed. Traditional hybrid approaches emphasise automatic response to lower than anticipated abatement costs, but we find adjusting emissions targets over time is the better way to deal with this in the context of climate policy. We find, however, that a price floor is well suited to addressing policy generated carbon price risk as domestic and international policy frameworks mature, reducing the risk of unintended low carbon prices. Reducing such downside risk can encourage cost effective investment in lowemissions assets that might otherwise be precluded by perceived policy risks, even if the price floor is never actually triggered. In Australia’s planned ETS, a price floor could support investments that lower the national emissions trajectory, and boost policy stability and credibility. A price floor in operation can increase the static costs of achieving a given emissions target, but reduce economic costs over time. Assessment of implementation options suggests a domestic reserve price for auctioned permits along with a periodically adjusted fee on the conversion of international permits for use in the domestic ETS. This approach minimises administrative complexity and avoids arbitrary interventions in carbon markets.

Suggested Citation

  • Jotzo, Frank & Hatfield-Dodds, Steve, 2011. "Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View," Working Papers 249528, Australian National University, Centre for Climate Economics & Policy.
  • Handle: RePEc:ags:ancewp:249528
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    References listed on IDEAS

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    1. Frank Jotzo, 2011. "Carbon Pricing that Builds Consensus and Reduces Australia's Emissions: Managing Uncertainties Using a Rising Fixed Price Evolving to Emissions Trading," CCEP Working Papers 1104, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
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    Cited by:

    1. Jotzo, Frank, 2013. "Emissions trading in China: Principles, design options and lessons from international practice," Working Papers 249405, Australian National University, Centre for Climate Economics & Policy.

    More about this item

    Keywords

    Environmental Economics and Policy; Risk and Uncertainty;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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