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

Listed author(s):
  • Frank Jotzo


    (Crawford School of Economics & Government, Australian National University, Canberra, ACT, Australia)

  • Steve Hatfield-Dodds


    (CSIRO Energy Transformed Flagship, Canberra, ACT, Australia
    Centre for Climate Economics and Policy, Crawford School of Economics & Government, Australian National University, Canberra, ACT, Australia)

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 low-emissions 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.

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Paper provided by Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University in its series CCEP Working Papers with number 1105.

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Date of creation: May 2011
Handle: RePEc:een:ccepwp:1105
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  1. 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.
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