When is a carbon price floor desirable?
David M Newbery (),
David Reiner () and
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
The EU carbon price lies well below estimates of the social cost of carbon and “target-consistent” carbon prices needed to deliver ambitious targets such as the 40% reduction target for 2030. In light of this, the UK introduced a carbon price floor (CPF) for its electricity sector in 2013 and the new Dutch Government has recently made a similar commitment, while successive French Governments have called for an EU-wide CPF. This paper analyzes the impacts and design of a power-sector CPF, both at the EU and national level, using a political-economy approach. We find a good case for introducing such a price-based instrument into the EU ETS. We suggest that a CPF should be designed to “top up” the EUA price to €25–30/tCO2, rising annually at 3–5% above inflation, at least until 2030. We argue that the new EU Market Stability Reserve enhances the value of a CPF in terms of delivering climate benefits, and discuss the potential for a regional CPF in North-West Europe. We also review international experience with price floors (and ceilings).
Keywords: Carbon pricing; electricity markets; market failure; policy failure; political economy; price floor; price corridor (search for similar items in EconPapers)
JEL-codes: H23 L94 Q48 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur and nep-reg
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Working Paper: When is a carbon price floor desirable? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1833
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