EconPapers    
Economics at your fingertips  
 

A carbon price floor in the reformed EU ETS: Design matters!

Martin Hintermayer

Energy Policy, 2020, vol. 147, issue C

Abstract: Despite the reform of the European Emissions Trading System (EU ETS), discussions about complementing it with a carbon price floor (CPF) are ongoing. This paper analyzes the effect of a European CPF in the reformed EU ETS using a Hotelling model of the EU ETS, amended by the market stability reserve (MSR), and the cancellation mechanism. Two CPF designs are compared: (1) a buyback program and (2) a top-up tax. The buyback program sets a minimum price for the allowances from the implementation year onwards. After the announcement, firms anticipate the CPF, which immediately increases the carbon price to the discounted CPF level. Therefore, firms emit less and bank more allowances, leading to more intake into the MSR, and more cancellation of allowances. The top-up tax imposes a tax on emissions, which enhances the market price of allowances to the CPF level from the implementation year onwards. Firms increase their short-run emissions in anticipation of the upcoming tax. Only after the implementation year firms start to lower their emissions. Thus, the effect on aggregate cancellation is ambiguous. Despite being equivalent in a static setting, the design choice for the CPF matters in a dynamic context, such as the EU ETS.

Keywords: Intertemporal emission trading; Carbon price floor; EU ETS (search for similar items in EconPapers)
JEL-codes: H23 H32 Q58 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0301421520306170
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:147:y:2020:i:c:s0301421520306170

DOI: 10.1016/j.enpol.2020.111905

Access Statistics for this article

Energy Policy is currently edited by N. France

More articles in Energy Policy from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

 
Page updated 2021-04-12
Handle: RePEc:eee:enepol:v:147:y:2020:i:c:s0301421520306170