A Carbon Price Floor in the Reformed EU ETS: Design matters!
Martin Hintermayer ()
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Martin Hintermayer: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI), https://www.ewi.uni-koeln.de/en/
No 2020-3, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
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)
Pages: 40 pages
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2020_003
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