Emissions Markets with Price Stabilizing Mechanisms: Possible Unpleasant Outcomes

Paolo Casini and Edilio Valentini ()
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Paolo Casini: KU Leuven

No 2019.16, Working Papers from Fondazione Eni Enrico Mattei

Abstract: There is a large consensus that low levels of carbon price cannot provide adequate incentives to invest in cleaner technologies and abate emissions. Since carbon demand and price tend to decrease during recessions, economists and policy makers have proposed different types of price stabilizing mechanisms (PSM) for emissions markets to prevent carbon price from falling too low. We investigate the effects of a PSM on investments and emissions and show that when unfavorable macroeconomic conditions reduce emissions, adjusting the supply of allowances to sustain their price may inhibit investments. Moreover, when firms invest in an integrated abatement technology, not only can emissions increase - an effect previously examined in the literature - but a PSM can exacerbate this effect when an exogenous negative shock curbs the demand of carbon.

Keywords: Carbon Markets; Price Stabilizing Mechanisms; Macroeconomic Recession (search for similar items in EconPapers)
JEL-codes: Q5 Q55 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Working Paper: Emissions Markets with Price Stabilizing Mechanisms: Possible Unpleasant Outcomes (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2019.16

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