The EUETS stands alone in not managing price – time to change?

The EUETS stands alone in currently excluding any element of price management from its basic design.  In this respect it can learn from other schemes.

The current debate on whether the backload the sale of EU allowances is in many ways a distraction from the more important issue of structural reform.  The Commission’s review of the EUETS published last year mentioned price management as an option for structural reform (Option f in the document)i.  I have previously talked about the way in which carbon pricing lies on a spectrum between pure emissions trading and pure taxes (27th March 2013), and looked at the role of floor prices in emissions trading schemes (2nd May 2013).  In the context of the current debate on EUETS reform it seems worth further emphasising how exceptional the EUETS is in not already including some element of price management in its design.

Every other carbon pricing scheme in the world contains some element of price management or fixed pricing, or (for those schemes still being designed) seems likely to put something in place, with the only possible exception I am aware of being Kazahkstan.  The measures that have been introduced or are being considered – floors, ceilings, market interventions, and carbon taxes – are summarised in the table at the end of this post.

There are many reasons why governments may wish to introduce such mechanisms.  They may be concerned about the economic damage of very high prices, or that low prices will fail to stimulate the necessary long-term investment, or that they do not wish to see the price fall below the range plausible estimates of the likely cost of the damage due to additional emissions.  In any case, pervasive uncertainties in advance about both the effects of climate change and the cost of mitigation imply that simultaneous attention to both prices and quantities is appropriate.  (A review of the reasons for this will need to await another post, but it is a well-established principle.)

There will of course be political challenges in negotiating the form and level of any price thresholds in the EUETS, with some eastern European member states likely to favour lower values than some in western Europe.  But whatever form and level of price containment in the EUETS proves achievable, the presence of such mechanisms in every other scheme in the world surely at least warrants a close look at how such mechanisms might benefit the EUETS.

The EUETS was a pioneering scheme, and other schemes have learnt much from it.  Now other schemes are up and running, and the EUETS can learn from them in return.  And one of the things it can learn is that price containment mechanisms are an appropriate component of emissions trading schemes.

Adam Whitmore – 25th June 2013

Scheme Price floor Price Ceiling Notes
California, $10 + 5% p.a. real escalation auction floor $40/45/50 + 5% p.a. real. Reserve tranche volume increasing over time. The floor appeared to influence the first auction and some future tranches
Quebec C$10 + 5% p.a. real escalation, auction floor c$40/45/50 + 5% p.a. real Linked to California as part of the WCI
RGGI c. $2 constant real, auction floor price Increased offsets at price thresholds.  Moving to Cost Containment Reserve, at $4 in 2014 rising to $10 by 2017, 2.5% p.a. nominal  increase thereafter The floor has been effective in sustaining prices despite chronic oversupply
Alberta No $15/tonne buyout price, may rise to $30-40/tonne following review A hybrid baseline and credit scheme and tax
British Columbia Carbon tax fixed at C$30 May adopt emissions trading in future as part of WCI, but does not appear likely at present.
Australia (pre EU link) A$15 + escalation (abolished with EU link) $20 above EU price, rising annually Fixed price of A$23 rising at 5% nominal p.a. for first three years
New Zealand No Price ceiling at NZ$25 Effective ceiling lower due to 2 for 1 surrender provisions
Prospective schemes
China pilot schemes Likely to have some kind of price management through buying/selling of allowances, perhaps in a “central carbon bank” type model
South Korea Understood to be examining a wide variety of options, including a review committee with powers to implement measures such as increased supply and price floors
South Africa Carbon tax at Rand120/tonne

 

[i] The State of the European Carbon Market in 2012 Com (2012) 652 final, Brussels 14.11.2012 http://ec.europa.eu/clima/policies/ets/reform/docs/com_2012_652_en.pdf

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