Climate | Other
Linking emissions trading systems with different price control mechanisms
04 December 2020
BY: GALDI Giulio, VERDE Stefano F., Simone Borghesi, Albert Ferrari
Most existing Emissions Trading Systems (ETSs) include their own specific Price Control Mechanism (PCM): a design feature which steers the allowance price into a desired range. Divergences along five key dimensions of PCMs may impact linking between ETSs in several ways, positive or negative. Restricted linking, e.g. exchange ratios or import quotas on allowances, could mitigate adverse effects of PCM differences between prospective partners. Convergence towards soft and price-based PCMs is both desirable and likely difficult to accomplish. PCMs may increase allocative efficiency if they make the allowance supply more responsive to shocks. The most effective way to reduce long term price uncertainty remains creating an environmentally ambitious climate policy framework.
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