Prices In Emissions Permit Markets: The Role Of Investor Foresight And Capital Durability
Of the many regulatory responses to climate change, cap-and-trade is the only one currently endorsed by large segments of the scientific, economic and political establishments. Under this type of system, regulators set the overall path of carbon dioxide (CO2) reductions, allocate or auction the appropriate number of emissions allowances to regulated entities and – through trading – allow the market to converge upon the least expensive set of abatement opportunities. As a result, the trading price of allowances is not set by the regulator as it would be under a tax system, but instead evolves over time to reflect the underlying supply and demand for allowances. In this paper, I develop a simple theory that relates the initial clearing price of CO2 allowances to the marginal cost premium of carbon-free technology, the maximum rate of energy capital replacement and the market interest rate. This theory suggests that the initial clearing price may be lower than the canonical range of CO2 prices found in static technology assessments. Consequently, these results have broad implications for the design of a comprehensive regulatory solution to the climate problem, providing, for example, some intuition about the proper value of a possible CO2 price trigger in a future cap-and-trade system.
|Date of creation:||Oct 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: http://cama.crawford.anu.edu.auEmail:
More information through EDIRC
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.:
- Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
- Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
- Warwick J. McKibbin & Peter J. Wilcoxen, 2003.
"Estimates of the Costs of Kyoto-Marrakesh versus the McKibbin-Wilcoxen Blueprint,"
Economics and Environment Network Working Papers
0305, Australian National University, Economics and Environment Network.
- McKibbin, Warwick J. & Wilcoxen, Peter J., 2004. "Estimates of the costs of Kyoto: Marrakesh versus the McKibbin-Wilcoxen blueprint," Energy Policy, Elsevier, vol. 32(4), pages 467-479, March.
- Warwick J. McKibbin & Peter J Wilcoxen, 2003. "Estimates of the Costs of Kyoto-Marrakesh Versus The McKibbin-Wilcoxen Blueprint," Departmental Working Papers 2003-14, The Australian National University, Arndt-Corden Department of Economics.
- Carlson, Curtis & Burtraw, Dallas & Cropper, Maureen & Palmer, Karen L., 1998.
"Sulfur dioxide control by electric utilities : what are the gains from trade?,"
Policy Research Working Paper Series
1966, The World Bank.
- Curtis Carlson & Dallas Burtraw & Maureen Cropper & Karen L. Palmer, 2000. "Sulfur Dioxide Control by Electric Utilities: What Are the Gains from Trade?," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1292-1326, December.
- Burtraw, Dallas & Palmer, Karen & Cropper, Maureen & Carlson, Curtis, 1998. "Sulfur-Dioxide Control By Electric Utilities: What Are the Gains from Trade?," Discussion Papers dp-98-44-rev, Resources For the Future.
- van Vuuren, Detlef P. & Weyant, John & de la Chesnaye, Francisco, 2006. "Multi-gas scenarios to stabilize radiative forcing," Energy Economics, Elsevier, vol. 28(1), pages 102-120, January.
- Pizer, William & Newell, Richard & Zhang, Jiangfeng, 2003.
"Managing Permit Markets to Stabilize Prices,"
dp-03-34, Resources For the Future.
When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2008-31. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Cama Admin)
If references are entirely missing, you can add them using this form.