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Carbon Markets

Oliver Tickell is a strange bloke, isn\’t he?

But the carbon market also has to provide a secure, long-term price signal if it is to attract private investment in clean energy infrastructure on the scale we need – and the current carbon-price yoyo is failing entirely in this respect. Wild fluctuations create a risk that deters some investors altogether and makes others demand a significant risk premium, putting up the price of capital. We therefore need to create a floor price for carbon within the European trading system at which the EU will buy back allowances and so underpin the market. This floor price needs to be high enough to pitch the investors\’ preference away from coal and gas and towards renewables.

Ideally there would also be ceiling price at the top end to prevent damaging price spikes which can cause economic damage while doing nothing to encourage long-term investment.

We need a market in carbon but we don\’t want to have the prices which that market reveals to us?

Not much point in having a market then, is there, if you\’re going to ignore what information said market reveals. Why not just set the price of the permit?

That is, let\’s have a carbon tax, not cap and trade?

6 thoughts on “Carbon Markets”

  1. He actually seems to be referring to a form of Roberts-Spence hybrid price-quantity economic instrument, which – it is argued – can be an appropriate policy response given uncertainty about marginal damage curves and marginal abatement curves. This is possibly closer to the situation that we have in the real world where no-one is actually able to estimate properly the shadow price of carbon, or what emission reductions such a price would induce.

  2. Or how about leaving the plant food market to the… market! Then we’d truly see what people would pay for “Carbon”.

  3. Better still, let’s have neither… It’s becoming increasingly obvious that CO2 is not the all-encompassing driver of “global warming”, so, unless the intention is to screw the Arabs, I can’t see any reasonable rationale for “carbon taxes”.

  4. Carbon taxes are only good if they replace other, worse taxes.
    E.g. replacing Employers’ National Insurance Contributions and thus lifting the disincentive to employ (particularly useful right now)
    Doing so would probably be a reasonable trade-off for businesses as well – shifting their behavioural incentives from employing fewer people to using less carbon.

    Tim adds: Agreed, entirely.

  5. Yo JK, good to hear from someone who knows their economics! Yes, this is exactly it. Hey, I had to learn all this stuff, and you just know it … brilliant!

    Re Anton Howes’s comment, this is not the whole story. What we are talking about is making good uncompensated losses imposed on the world as a whole by greenhouse gas emissions, but a levy on emissions. But one you have done that you are actually better off stopping the damage in the first place by investing in mitigation, than by allowing the damage to take place and compensating for it. This is what Stern figured out, following in a noble Pigovian tradition.

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