Emissions Trading with Clean-Up Certificates: Deterring Mitigation or Increasing Ambition?

37 Pages Posted: 25 Jun 2024

See all articles by Kai Lessmann

Kai Lessmann

Potsdam-Institut für Klimafolgenforschung (PIK)

Friedemann Gruner

Mercator Research Institute on Global Commons and Climate Change (MCC)

Matthias Kalkuhl

Mercator Research Institute on Global Commons and Climate Change (MCC)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: 2024

Abstract

We analyze how conventional emissions trading schemes (ETS) can be modified by introducing ”clean-up certificates” to allow for a phase of net-negative emissions. Clean-up certificates bundle the permission to emit CO2 with the obligation for its removal. We show that demand for such certificates is determined by cost-saving technological progress, the discount rate and the length of the compliance period. Introducing extra clean-up certificates into an existing ETS reduces near-term carbon prices and mitigation efforts. In contrast, substituting ETS allowances with clean-up certificates reduces cumulative emissions without depressing carbon prices or mitigation in the near term. We calibrate our model to the EU ETS and identify reforms where simultaneously (i) ambition levels rise, (ii) climate damages fall, (iii) revenues from carbon prices rise and (iv) carbon prices and aggregate mitigation cost fall. For reducing climate damages, roughly half of the issued clean-up certificates should replace conventional ETS allowances. In the context of the EU ETS, a European Carbon Central Bank could manage the implementation of clean-up certificates and could serve as an enforcement mechanism.

JEL Classification: H230, Q540, Q580

Suggested Citation

Lessmann, Kai and Gruner, Friedemann and Kalkuhl, Matthias and Edenhofer, Ottmar, Emissions Trading with Clean-Up Certificates: Deterring Mitigation or Increasing Ambition? (2024). CESifo Working Paper No. 11167, Available at SSRN: https://ssrn.com/abstract=4875544 or http://dx.doi.org/10.2139/ssrn.4875544

Kai Lessmann (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

HOME PAGE: http://https://pik-potsdam.de/members/lessmann

Friedemann Gruner

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

Matthias Kalkuhl

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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