The Benefits of Carbon Banks for Cap-and-Trade Systems

Instructors who include modules on the European Union-Emissions Trading Scheme (EU-ETS) in their courses might consider assigning a recent policy brief by the think-tank Sustainable Prosperity, A Carbon Bank: Managing Volatility in a Cap-and-Trade System. The brief focuses on the the desirability of establishing a Carbon Bank to address some of the problems that afflict the EU-ETS, as well as cap and trade systems more generally. Among the take-aways from the brief:

  1. Industries in the EU were able to successfully influence the final design of the EU-ETS, including limiting its scope to carbon dioxide instead of the six greenhouse gases originally proposed, limiting the regulated sectors, and ensuring that a large number of allowances were allocated at no charge;
  2. Among the issues that have plagued the EU-ETS beyond rent-seeking behavior of industries are fraud and theft, and most importantly price volatility, with the price of allowances dropping approximately 80% in one brief period in 2005-2006;
    1. On the other hand, there are some possible benefits of price volatility; some reason studies indicate that price suppression through offsets and other mechanisms may delay clear energy investments
  3. A carbon bank could manage price through an array of price control mechanisms, including price ceilings or collars, yearly target prices, allowance splits or safety valves;
  4. Carbon banks could also perform other functions for cap and trade systems, including professional forecasting about the implications of different emission and carbon price scenarios, allowance management and coordination with other government bodies;
  5. There are potential downsides to implementing a carbon bank, including potentially undermining carbon prices if intervention occurs too frequently;
  6. Carbon banks might find it difficult to manage carbon prices because of difficulty of linking carbon dioxide production with economic growth and energy prices, and the difficulty of managing prices given long-term goals of decreasing allowances.

Among the questions for class discussion might include the following:

  • Do you think that parties to the EU-ETS would be willing to accord a carbon bank the power to control market prices. Does the failure of the EU to implement a carbon tax because of some member State resistance provide any evidence in this context?
  • Is the concept of institutional prices control mechanisms antithetical to the operation of a free-market based system e.g. cap and trade?;
  • Should a proposed Carbon Bank have the ability to permanently withdraw allowances from the market without requiring EU States to vote to authorize this action?



Related posts:

  1. Cap and Trade’s Implications for Technology Innovation
  2. What to do about the EU-ETS
  3. New Carbon Market Data on the EU-ETS
  4. The Future of Cap & Trade?
  5. New Video on Cap and Trade

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