SLIDE 1
Overview
- The key elements of carbon policy
- Putting a price on carbon
- Tax vs trade
- Tax and trade
- Hybrid instruments
- Conclusions
Policy Instruments for a Low-Carbon Economy CCCEP Conference on - - PowerPoint PPT Presentation
Policy Instruments for a Low-Carbon Economy CCCEP Conference on - - PowerPoint PPT Presentation
Policy Instruments for a Low-Carbon Economy CCCEP Conference on Grand Challenges 16 September 2010 Sam Fankhauser Grantham Research Institute and CCCEP London School of Economics Overview The key elements of carbon policy Putting a
SLIDE 2
SLIDE 3
The key elements of carbon policy
Put a price
- n carbon
Support low-carbon technology Remove barriers to energy efficiency Taxes, Cap & trade R&D policy Regulation Incentives Finance
SLIDE 4
Taxes vs permits: the basic Weitzman result
- Marg. Abatement Cost
Flat MB curve
- Marg. Abatement Cost
Steep MB curve target target MAC MAC MB MB
SLIDE 5
Taxes vs permits: the basic Weitzman result
- Marg. Abatement Cost
Choose tax
- Marg. Abatement Cost
Choose permits target target MAC MAC MB MB
SLIDE 6
Applying Weitzman to Climate Change
- For stock pollutants the marginal damage curve is flat
in the short run (Pizer, Hoel)
- Because the atmospheric stock is large, emissions
today have the same effect as emissions tomorrow
- Some countries have adopted (more or less) binding
carbon constraints (UK, all of Annex 1)
- Meeting a fixed target through a price is expensive
(Fehr): their marginal benefit curve is steep
- Political economy favours cap and trade
SLIDE 7
Combining taxes with trade
- Policy makers are increasingly willing to combine
taxes with trade
- Either to underpin the price (UK, France) or create a
safety valve (US, Australia)
- They also combine other market instruments with
trade (e.g. renewable energy support)
- Multiple market failures justify multiple instruments
- e.g. the case for R&D support
- But there can be unintended consequences
SLIDE 8
Example: UK policies parallel to the EU ETS
- Tax and trade
- Climate Change Levy
- Subsidy and trade
- Renewable heat incentive; small-scale feed in tariff
- Trade on trade
- CRC Energy Efficiency Scheme
- Regulation and trade
- Renewable energy obligation, energy performance
standards
SLIDE 9
Combining taxes with trade: the simplest case
A tax on top of the cap reduces the carbon price by the same amount. The overall price signal (t+p) is constant, but the carbon market is undermined
price
target MAC
cap
p t quantity
SLIDE 10
Targeted taxes or subsidies may have the same effect
The expensive mitigation action D (renewables?) is forced into the mix, reducing the price at the margin and crowding out action C
Q
abatement
Q
abatement
MAC ($)
A B F
p* Q*
C E D $s
MAC ($) p*
A B F
Q*
C E D $s
p’ Q
abatement
Q
abatement
MAC ($)
A B F
p* Q*
C E D $s
MAC ($) p*
A B F
Q*
C E D $s
p’ Q
abatement
MAC ($)
A B F
p* Q*
C E D $s
MAC ($) p*
A B F
Q*
C E D $s
p’ MAC ($) p*
A B F
Q*
C E D $s
p’
SLIDE 11
Support of intra-marginal activities creates rent
Q
abatement
Q
abatement
MAC ($)
A
p* Q*
C E D F B $s
MAC ($)
A
p* Q*
C E D F B $s
Q
abatement
Q
abatement
MAC ($)
A
p* Q*
C E D F B $s
MAC ($)
A
p* Q*
C E D F B $s
Q
abatement
MAC ($)
A
p* Q*
C E D F B $s B $s
MAC ($)
A
p* Q*
C E D F B $s B $s
SLIDE 12
Support of extra-marginal activities has no price effect
Q
abatement
MAC ($)
A B
p* Q*
C E D F $s
Q
abatement
MAC ($)
A B
p* Q*
C E D F $s
Q
abatement
MAC ($)
A B
p* Q*
C E D F $s F $s
Q
abatement
MAC ($)
A B
p* Q*
C E D F $s F $s
SLIDE 13
Hybrid instruments
- Auction reserve price
- Underpins the carbon price
- Safety valve
- Curtails the carbon price
- Cap and collar
- Combines reserve price and safety valve
- Contract for differences
- Stabilises the carbon price
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Collar creates an upward sloping supply curve
price price quantity quantity
Fixed cap Collar
D’ D D’ D
p p
S = cap
q q = const
S
Reduces price fluctuation but introduces quantity uncertainty
SLIDE 15
Conclusions
- Price ceilings and underpins (cap and collar) may be
justified if excessive price fluctuations are undesirable
- Support for particular technologies (renewables, CCS)
may be desirable from a long-term perspective
- Subsidising the move down the learning curve
- Hybrid instruments are better at stabilising the carbon
price than pure tax and trade
SLIDE 16
Other work by the LSE Carbon Market Group
- Linking regional cap-and-trade schemes
- Hybrid schemes and other price containment
mechanisms
- Understanding Carbon Price Fluctuations
- Understanding the CDM – EUA spread
- Impact of Carbon Regulation on Technology Uptake
and Innovation
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