IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Combining multiple climate policy instruments: how not to do it

  • Samuel Fankhauser
  • Cameron Hepburn
  • Jisung Park

Putting a price on carbon is critical for climate change policy. Increasingly, policymakers combine multiple policy tools to achieve this, for example by complementing cap-and-trade schemes with a carbon tax, or with a feed-in tariff. Often, the motivation for doing so is to limit undesirable fluctuations in the carbon price, either from rising too high or falling too low. This paper reviews the implications for the carbon price of combining cap-and-trade with other policy instruments. We find that price intervention may not always have the desired effect. Simply adding a carbon tax to an existing cap-and-trade system reduces the carbon price in the market to such an extent that the overall price signal (tax plus carbon price) may remain unchanged. Generous feed-in tariffs or renewable energy obligations within a capped area have the same effect: they undermine the carbon price in the rest of the trading regime, likely increasing costs without reducing emissions. Policymakers wishing to support carbon prices should turn to hybrid instruments � that is, trading schemes with pricelike features, such as an auction reserve price � to make sure their objectives are met.

If 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.

File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/WP38_UK-carbon-tax.pdf
Download Restriction: no

Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 38.

as
in new window

Length:
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:lsg:lsgwps:wp38
Contact details of provider: Postal:
Houghton Street, London WC2A 2AE

Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/grantham.

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2005. "A tale of two market failures: Technology and environmental policy," Ecological Economics, Elsevier, vol. 54(2-3), pages 164-174, August.
  2. Sáenz de Miera, Gonzalo & del Ri­o González, Pablo & Vizcaino, Ignacio, 2008. "Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain," Energy Policy, Elsevier, vol. 36(9), pages 3345-3359, September.
  3. DeCanio, Stephen J, 1998. "The efficiency paradox: bureaucratic and organizational barriers to profitable energy-saving investments," Energy Policy, Elsevier, vol. 26(5), pages 441-454, April.
  4. Michael Hoel & Larry Karp, 1999. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Working Papers 1999.15, Fondazione Eni Enrico Mattei.
  5. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2010. "The Environment and Directed Technical Change," Working Papers 2010.93, Fondazione Eni Enrico Mattei.
  6. Richels, Richard G. & Blanford, Geoffrey J., 2008. "The value of technological advance in decarbonizing the U.S. economy," Energy Economics, Elsevier, vol. 30(6), pages 2930-2946, November.
  7. Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2012. "Prices versus quantities versus bankable quantities," Resource and Energy Economics, Elsevier, vol. 34(4), pages 607-623.
  8. Gilbert E. Metcalf, 2009. "Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility," NBER Working Papers 15125, National Bureau of Economic Research, Inc.
  9. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
  10. Jacoby, Henry D. & Ellerman, A. Denny, 2004. "The safety valve and climate policy," Energy Policy, Elsevier, vol. 32(4), pages 481-491, March.
  11. Stavins, Robert, 2007. "A U.S. Cap-and-Trade System to Address Global Climate Change," Working Paper Series rwp07-052, Harvard University, John F. Kennedy School of Government.
  12. 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.
  13. Popp, David, 2006. "ENTICE-BR: The effects of backstop technology R&D on climate policy models," Energy Economics, Elsevier, vol. 28(2), pages 188-222, March.
  14. Hepburn, C.J. & Quah, J.K.-H. & Ritz, R.A., 2012. "Emissions Trading with Profit-Neutral Permit Allocations," Cambridge Working Papers in Economics 1235, Faculty of Economics, University of Cambridge.
  15. Hepburn, C. & Grubb, M. & Neuhoff, K. & Matthes , F. & Tse, M., 2006. "Auctioning of EU ETS Phase II allowances: how and why?," Cambridge Working Papers in Economics 0644, Faculty of Economics, University of Cambridge.
  16. Cédric Philibert, 2009. "Assessing the value of price caps and floors," Climate Policy, Taylor & Francis Journals, vol. 9(6), pages 612-633, November.
  17. Rosendahl, Knut Einar, 2004. "Cost-effective environmental policy: implications of induced technological change," Journal of Environmental Economics and Management, Elsevier, vol. 48(3), pages 1099-1121, November.
  18. 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.
  19. Unger, Thomas & Ahlgren, Erik O., 2005. "Impacts of a common green certificate market on electricity and CO2-emission markets in the Nordic countries," Energy Policy, Elsevier, vol. 33(16), pages 2152-2163, November.
  20. Schmidt, Robert C. & Marschinski, Robert, 2009. "A model of technological breakthrough in the renewable energy sector," Ecological Economics, Elsevier, vol. 69(2), pages 435-444, December.
  21. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
  22. David Popp, 2006. "Comparison of Climate Policies in the ENTICE-BR Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 163-174.
  23. Rathmann, M., 2007. "Do support systems for RES-E reduce EU-ETS-driven electricity prices?," Energy Policy, Elsevier, vol. 35(1), pages 342-349, January.
  24. Fischer, Carolyn, 2008. "Emissions pricing, spillovers, and public investment in environmentally friendly technologies," Energy Economics, Elsevier, vol. 30(2), pages 487-502, March.
  25. Cameron Hepburn & Samuel Fankhauser, 2010. "Designing carbon markets, part II: carbon markets in space," LSE Research Online Documents on Economics 28833, London School of Economics and Political Science, LSE Library.
  26. Stavins, Robert & Keohane, Nathaniel & Revesz, Richard, 1997. "The Positive Political Economy of Instrument Choice in Environmental Policy," Discussion Papers dp-97-25, Resources For the Future.
  27. Fankhauser, Samuel & Hepburn, Cameron, 2010. "Designing carbon markets. Part I: Carbon markets in time," Energy Policy, Elsevier, vol. 38(8), pages 4363-4370, August.
  28. De Jonghe, Cedric & Delarue, Erik & Belmans, Ronnie & D'haeseleer, William, 2009. "Interactions between measures for the support of electricity from renewable energy sources and CO2 mitigation," Energy Policy, Elsevier, vol. 37(11), pages 4743-4752, November.
  29. André Grimaud & Gilles Lafforgue✝, 2008. "Climate change mitigation policies : Are R&D subsidies preferable to a carbon tax ?," Revue d'économie politique, Dalloz, vol. 118(6), pages 915-940.
  30. Lori Bennear & Robert Stavins, 2007. "Second-best theory and the use of multiple policy instruments," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(1), pages 111-129, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:lsg:lsgwps:wp38. 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: (The GRI Administration)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.