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Caps and Floors for the EU ETS: a practical carbon price

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... Fluctuations are to be expected depending on the changing circumstances of many agents. A case has been made by Helm for containing the price variation by imposing a floor and a ceiling on permits prices (Helm, 2008b). Not just a help to investors and a guard against a public backlash during oil price spikes, such a proposal has an economic rationale. ...
... The implications are that the floor and ceiling on the permit price should be indexed inversely to the oil price. This would suit both producers and households (Helm, 2008b). ...
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Ireland will require more ambitious domestic policies to achieve the longer-term targets that the European Union has set for the period to 2020, depending on the timing of the economic up-turn, and certainly for the period beyond. Climate change is a great and wide-ranging form of market failure. The pricing of global resources (in this case the Earth’s atmosphere) does not take appropriate account of the services they provide or their scarcity, and actors in the global economic system can make financial gains from activities that disregard the long-term collective interest of the planet. Such resources that are not naturally subject to anybody’s control are prone to the “tragedy of the commons”. Government intervention can correct for the market failure by providing an enabling framework, through legislation, incentives, and above all the predictability of forward planning. This survey of some of the options available to the Irish government begins by sketching the trends of Ireland’s emissions to date and the policies and measures already adopted by governments over the past decade. Main measures surveyed include legislative measures, market- and incentive-based measures, standards & regulations, subsidies and research & development. Respective arguments for and against these various approaches are covered. Finally some basic normative principles that should support climate policy in Ireland in the future are discussed, including a minimised cost of reduction (with equal cost per emission reduced), regulatory certainty, clearly defined incentives and a transparent, dynamic and fair process for decision-making and policy implementation.
... Set III introduces the possibility of some price management in the This option (Set III) therefore converts the EU ETS from a pure quantity-based instrument to a hybrid scheme in order to reduce the uncertainty of permit prices. A wide range of mechanisms introducing greater price certainty in a trading scheme have been discussed in the literature, including (1) price floors (Helm, 2008;Wood & Jotzo, 2011), (2) price caps (Jacoby & Ellerman, 2004;Pizer, 2002), and (3) soft (with allowance reserves) and hard price corridors (Burtraw, Palmer, & Kahn, 2009;Fell, Burtraw, Morgenstern, Palmer, & Preonas, 2010;Hepburn, 2006;McKibbin et al., 2009;Murray, Newell, & Pizer, 2008). A soft price collar normally includes a minimum price at auction, but is limited in its ability to control price hikes by an allocation reserve, whereas a hard price collar allows for unlimited quantity adjustments to achieve fixed price levels (see Fell et al., 2010, for a comparison). ...
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Since the crash of carbon prices in phase II of the European Union Emissions Trading System (EU ETS), many have argued that the low price mirrors structural failures requiring intervention. A wide range of reform options have been suggested, including delegating the governance of the carbon market to an independent authority. This article analyses the debate by reconstructing the various arguments for or against reform. Three possible drivers of the price decline are investigated: (1) exogenous shocks; (2) insufficient credibility; and (3) market imperfections. It is argued that the extent to which a low price is problematic and warrants reform depends on the specific objectives associated with the EU ETS and the perception on the functioning of the market. A two-dimensional EU ETS Reform Space, comprising the degree of price certainty within the EU ETS and the level of delegation, is devised. Within the Reform Space, EU ETS reform options currently discussed are mapped. This descriptive structure offers a framework to clarify whether delegation responds to various concerns with respect to the EU ETS. Delegation might enhance flexibility under unforeseen circumstances, decrease policy uncertainty, and increase the credibility of long-term policy commitments. However, higher degrees of delegation face challenges including democratic legitimacy and political feasibility.
... In this sense, the control of free allowances in the second and third phase may be more stringent than assumed in the paper to promote further technological innovation. In addition, necessary and reasonable price floors and ceilings may be set to ensure the effectiveness and efficiency of ETS (Helm 2008). For the industry, it is important to follow relevant abatement technological update, carbon market dynamics, and government policy to maximize payoff and avert unnecessary loss and risk. ...
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As one of China’s emissions trading system (ETS) pilots, Shenzhen established the first carbon market of China in 2013. With field data collection and benefit-cost analysis, this article assesses the abatement technology investment decisions of Shenzhen coal-fired power industry under different carbon price scenarios. The results indicate that Shenzhen ETS constitutes a main driver for the short-term technology investment of the industry, but the long-term stimulation effect appears quite limited, except for the integrated gasification combined cycle technology under high carbon price scenario. Further, the paper proposes the short-term and long-term optimal investment strategy for the industry, and relevant policy suggestions.
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