Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme

36 Pages Posted: 12 Mar 2019

See all articles by Jan Abrell

Jan Abrell

ETH Zürich - Centre for Energy Policy and Economics (CEPE)

Sebastian Rausch

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich; Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Hidemichi Yonezawa

Statistics Norway

Multiple version iconThere are 2 versions of this paper

Date Written: April 2019

Abstract

In this paper, we examine the introduction of a price floor in an emissions trading system (ETS) when some emissions are regulated outside the ETS. We theoretically characterize the conditions under which a price floor enhances welfare. Using a numerical simulation model of the European Union (EU), we find that moderate minimum prices in the EU ETS can reduce the costs of EU climate policy by up to 30 percent. We also find that, because of tax‐interaction effects, the optimal minimum price in the EU ETS should be about four times higher than the average marginal abatement cost in non‐ETS sectors.

Keywords: Emissions trading, EU ETS, general equilibrium, partitioned regulation, price floors

Suggested Citation

Abrell, Jan and Rausch, Sebastian and Yonezawa, Hidemichi, Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme (April 2019). The Scandinavian Journal of Economics, Vol. 121, Issue 2, pp. 446-481, 2019, Available at SSRN: https://ssrn.com/abstract=3349361 or http://dx.doi.org/10.1111/sjoe.12279

Jan Abrell (Contact Author)

ETH Zürich - Centre for Energy Policy and Economics (CEPE) ( email )

8092 Zurich
Switzerland

Sebastian Rausch

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

77 Massachusetts Ave, Bldg E40-474
Cambridge, MA 02139
United States

Hidemichi Yonezawa

Statistics Norway ( email )

N-0033 Oslo
Norway

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