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Potential Impacts of Subprime Carbon on Australia’s Impending Carbon Market

Author

Listed:
  • Patrick Hamshere

    (Department of Economics, University of Queensland)

  • Liam Wagner

    () (Department of Economics, University of Queensland)

Abstract

This paper examines the potential impacts of subprime carbon credits on the impending Australian carbon market. Subprime carbon could potentially be created in carbon offset markets that lack adequate regulation, as projects face risks that can overstate emissions abatement. Recent research suggests that subprime carbon credits will likely cause significant price instability in carbon markets, with some authors drawing parallels to the US market for mortgage backed securities during the subprime mortgage crisis (Chan, 2009). To assess the impacts of subprime carbon credits on the impending Australian carbon market, carbon price fundamentals are examined using a marginal abatement cost curve for the year 2020. The 2020 Australian marginal abatement cost curve is derived using a bottom-up model of the Australian electricity sector, as well as findings by the (DCC, 2009) and (McKinsey, 2008). Impacts are evaluated under several scenarios, which consider different trading scheme limits on the use of offsets; different proportions of offset credits that are subprime; and different emissions reduction targets. The results suggest that subprime carbon credits will always result in overall emissions reductions to be overstated, while sometimes increasing price volatility in the carbon market, depending on the steepness of the marginal abatement cost curve, the proportion of offset credits that are subprime, and the trading schemes limits on the use of offsets. We conclude that carbon markets could benefit significantly from a carbon offsets regulator, which would ensure the environmental and financial integrity of offset credits.

Suggested Citation

  • Patrick Hamshere & Liam Wagner, 2012. "Potential Impacts of Subprime Carbon on Australia’s Impending Carbon Market," Energy Economics and Management Group Working Papers 14, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uqeemg:14
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    File URL: http://www.uq.edu.au/eemg/docs/workingpapers/14.pdf
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    References listed on IDEAS

    as
    1. Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, vol. 25(5), pages 527-551, September.
    2. Flavio Menezes & John Quiggin & Liam Wagner, 2009. "Grandfathering and Greenhouse: The Role of Compensation and Adjustment Assistance in the Introduction of a Carbon Emissions Trading Scheme for Australia," Economic Papers, The Economic Society of Australia, vol. 28(2), pages 82-92, June.
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    More about this item

    Keywords

    Carbon Offsets; Marginal Abatement Cost; Carbon Market Regulation; Subprime Carbon;

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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