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

Author

Listed:
  • 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)

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 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.

Suggested Citation

  • Frank Jotzo & Steve Hatfield-Dodds, 2011. "Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View," CCEP Working Papers 1105, Centre for Climate & Energy Policy, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:ccepwp:1105
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    References listed on IDEAS

    as
    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 & Energy Policy, Crawford School of Public Policy, The Australian National University.
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How low can you go? A model for setting and increasing a carbon price
      by Frank Jotzo, Director, Centre for Climate Economics and Policy at Australian National University in The Conversation on 2011-06-03 09:31:41
    2. Carbon price floor axed, but EU market links a good substitute
      by Frank Jotzo, Director, Centre for Climate Economics and Policy at Australian National University in The Conversation on 2012-08-28 10:33:27
    3. Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View
      by David Stern in Stochastic Trend on 2011-06-02 03:32:00

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    Cited by:

    1. Frank Jotzo, 2013. "Emissions Trading in China: Principles, Design Options and Lessons from International Practice," CCEP Working Papers 1303, Centre for Climate & Energy Policy, Crawford School of Public Policy, The Australian National University.

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    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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