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When is a carbon price floor desirable?

David M Newbery (), David Reiner () and Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: 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
Date: 2018-06-15
Note: dmgn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

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