Potential Impacts of Subprime Carbon on Australia’s Impending Carbon Market

Patrick Hamshere and Liam Wagner
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Patrick Hamshere: Department of Economics, University of Queensland

No 14, Energy Economics and Management Group Working Papers from School of Economics, University of Queensland, Australia

Abstract: This paper examines the potential impacts of subprime carbon credits on the impending Australian carbon market. Subprime carbon could potentially be created in carbon offset markets that lack adequate regulation, as projects face risks that can overstate emissions abatement. Recent research suggests that subprime carbon credits will likely cause significant price instability in carbon markets, with some authors drawing parallels to the US market for mortgage backed securities during the subprime mortgage crisis (Chan, 2009). To assess the impacts of subprime carbon credits on the impending Australian carbon market, carbon price fundamentals are examined using a marginal abatement cost curve for the year 2020. The 2020 Australian marginal abatement cost curve is derived using a bottom-up model of the Australian electricity sector, as well as findings by the (DCC, 2009) and (McKinsey, 2008). Impacts are evaluated under several scenarios, which consider different trading scheme limits on the use of offsets; different proportions of offset credits that are subprime; and different emissions reduction targets. The results suggest that subprime carbon credits will always result in overall emissions reductions to be overstated, while sometimes increasing price volatility in the carbon market, depending on the steepness of the marginal abatement cost curve, the proportion of offset credits that are subprime, and the trading schemes limits on the use of offsets. We conclude that carbon markets could benefit significantly from a carbon offsets regulator, which would ensure the environmental and financial integrity of offset credits.

Keywords: Carbon Offsets; Marginal Abatement Cost; Carbon Market Regulation; Subprime Carbon (search for similar items in EconPapers)
JEL-codes: G01 G18 L51 Q31 Q52 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-reg
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