Discussion Paper: Architecture of the EU Emissions Trading System in Phase 3 and the Distribution of Allowance Asset Values 2015/10/23
Åsa Löfgren, Dallas Burtraw, Markus Wråke, and Anna Malinovskaya
Recent changes to the EU Emissions Trading System introduce structural changes regarding the initial distribution of emissions allowances, which are worth tens of billions of euros. A key change is the expanding role for auctions, which account for about half of the allowance allocation now and will be a growing share going forward. The use of revenue from auctions is a decision left to EU Member States and appears increasingly important. Well over half of auction revenue to date has been directed to energ and climate related purposes. Further, we do not find evidence that Member States have used state aid to electricity-intensive firms to strategically support domestic industry. The trading system is evolving in a way that is likely to improve its performance, but there remain important questions related the future pric of allowances and the distribution and use of asset value created under the trading system.
Push renewables to spur carbon pricing 2015/10/19
Gernot Wagner, Tomas Kåberger, Susanna Olai, Michael Oppenheimer, Katherine Rittenhouse & Thomas Sterner
Make wind and solar power even cheaper by opening up access to the electricity grid and ending fossil-fuel subsidiesPutting a price on carbon dioxide and other greenhouse gases to curb emissions must be the centrepiece of any comprehensive climate-change policy. We know it works: pricing carbon creates broad incentives to cut emissions. Yet the current price of carbon remains much too low relative to the hidden environmental, health and societal costs of burning a tonne of coal or a barrel of oil. The global average price is below zero, once half a trillion dollars of fossil-fuel subsidies are factored in.
Discounting and Relative Consumption 2015/10/19
Johansson-Stenman, O., and Sterner, T
We analyze optimal social discount rates when people derive utility from relative consumption, i.e. their own consumption level relative to the consumption level of others. We compare the social , private , and conventional Ramsey rates. Assuming a positive growth rate, we find that (1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption, and that (2) the social discount rate is lower than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.
Discussion Paper: Price and Quantity "Collars" for Stabilizing Emissions Allowance Prices 2015/10/13
Charles A. Holt, William Shobe
This paper reports the results of a laboratory experiment with financially motivated participants that is used to compare alternative proposals for managing the time path of emissions allowance prices in the face of random firm-specific and market-level structural shocks. In this setting, market performance measures such as social surplus are enhanced by the use of a price collar (auction reserve price and soft price cap). Comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances. In fact, in some specifications, the quantity collar performed worse than no stabilization policy at all. The experiment implemented a specific set of structural elements, and extrapolation to other settings should be done with caution. Nevertheless, an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important (although perhaps not exclusive) role to play in constructing an effective market stability reserve policy.
Discussion Paper: Comparing Policies to Confront Permit Over-allocation 2015/10/13
Instability in cap-and-trade markets, particularly with respect to permit price collapses has been an area of concern for regulators. To that end, several policies, including hybrid price-quantity mechanisms and the newly introduced "market stability reserve" (MSR) systems have been introduced and even implemented in some cases. I develop a stochastic dynamic model of a cap-and-trade system, parameterized to values relevant to the European Union's Emission Trading System (EU ETS) to analyze the performance of these policies aimed at adding stability to the system or at least at reducing perceived over-allocations of permits. Results suggest adaptive-allocation mechanisms such as a price collar or MSR can reduce permit over-allocations and permit price volatility in a more cost-e ective manner than simply reducing scheduled permit allocations. However, it is also found that the performance of these adaptive allocation policies, and in particular the MSR, are greatly a ected by assumed discount rates and policy parameters.
Discussion Paper: What Ails the European Union’s Emissions Trading System 2015/10/13
Stephen W. Salant
In theory, how a fixed number of storable pollution permits are allocated in a cap and-trade program should not affect intertemporal prices unless participants fail to receive permit endowments before they plan to use them. "Backloading" can create ineciency; "frontloading" cannot. The European Union's Emissions Trading System, however, is regarded as a counterexample where frontloading itself is creating inefficiency. This view underlies current policy proposals to backload permits or to create a Market Stability Reserve. The goal of these policies is to shrink the current inventory of permits carried by the private sector without tightening the cap. We question the most prominent theory of why frontloading has been excessive by comparing its implications to a theory that attributes recent movements in the spot price of permits to ongoing regulatory risk of a price collapse much like what occurred in the 1970's in anticipation of the devaluation of the Mexican peso or the sale of massive government gold stockpiles. Correct diagnosis should precede treatment advice: if frontloading is excessive, inefficiency can be eliminated by suitable backloading of permits; if regulatory risk is excessive, however, backloading either directly or with a market stability reserve is unlikely to reduce inefficiency.
Climate Policy Options and Consequences in the International Spotlight 2015/10/07
Dallas Burtraw, Carolyn Fischer, Peringe Grennfelt, Åsa Löfgren, Thomas Sterner, Markus Wråke and Lars Zetterberg
This report aims to help decision makers in industry and the electricity sector better understand the implications of current climate policies in the European Union, the United States, and around the world.Regardless of specific domestic approaches, or the outcomes of global negotiations, policies and actions to mitigate climate change will directly affect energy-intensive industries and the electricity sector around the world.With this in mind, researchers in the Mistra Indigo program have during the last years tackled important questions about the globalization of carbon markets, carbon pricing to encourage long-term investments in low-carbon technologies, the distributional effects of climate policies at various levels, and the interactions between climate regulations and markets.As the Mistra Indigo program is now moving towards the end, we have summed up some of our most important results regarding the subject in this report. Read the report (pdf, 3.1 MB)