Assessing the value of price caps and floors

Philibert, Cédric

doi:10.3763/cpol.2008.0586/splitsection3

Cited by 4 publications

(3 citation statements)

References 5 publications

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“…Such a system ultimately imposes price certainty at the expense of uncertainty about the quantity of emissions. More recently, studies have examined the performance of a "price collar"-that is, a safety valve (price ceiling) paired with a price floor [2,4,11].…”

Section: Background and Contextmentioning

confidence: 99%

“…For example, a cumulative reserve of 7 GT is sufficient to maintain a US $32/ton trigger price with 95% probability; but nearly 16 GT is necessary to limit prices to US $24/ton with the same degree of confidence. 11 This would require nearly Results from 100,000 trials 11 Note that these amounts represent the cumulative number of reserve allowances needed over the entire 20-year period, 2015-2034. Recall from our earlier discussion that if offsets are available to replenish the reserve, the initial reserve size could be much smaller.…”

Section: Demand For Reserve Allowances and The Size Of The Reservementioning

confidence: 99%

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Using an Allowance Reserve to Manage Uncertain Costs in a Cap-and-Trade Program for Greenhouse Gases

Golub

Keohane

2011

Environ Model Assess

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This paper investigates the design and performance of an allowance reserve in the context of a cap-and-trade program for greenhouse gases. We use a Monte Carlo approach in which the parameters of the marginal abatement cost function, and the supply of offsets, are drawn from specified distributions. Our framework focuses on the potential impact of "medium-run shocks" to abatement cost and offset supply, as opposed to either short-run volatility or permanent shifts in the cost curve. Our model suggests that under reasonable (and even fairly conservative) assumptions about abatement cost and offset supply, an allowance reserve broadly similar to recent proposals for US climate legislation can be effective in containing allowance prices. In our core policy scenario, with a trigger price equal to US $32 in 2015, we estimate that the probability of drawing on the allowance reserve is <25% and the probability of requiring more than 7 GT of reserve tons over 20 years is <5%. We also use the model to explore the trade-off among three features of the reserve that are most relevant to policy makers: the total size of the reserve, the trigger price, and the degree of confidence that the reserve will be large enough to limit allowance prices to the target level. Our essential result is that a lower trigger price, or a higher degree of confidence, requires a larger reserve.

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Section: Background and Contextmentioning

confidence: 99%

Section: Demand For Reserve Allowances and The Size Of The Reservementioning

confidence: 99%

Using an Allowance Reserve to Manage Uncertain Costs in a Cap-and-Trade Program for Greenhouse Gases

Golub

Keohane

2011

Environ Model Assess

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“…On the other hand, the financial liability due to regulatory exposure for larger emitting facilities increases with carbon market price. In some emissiontrading systems, price floors are used to guarantee minimum abatement efforts while price ceilings are used to manage cost uncertainty (Philibert, 2009). …”

Section: Introductionmentioning

confidence: 99%

Navigating Canada's greenhouse gas policy landscape: a comparison of carbon market mechanisms in the oil and gas sector

Tarnoczi

Driver²

2014

Greenhouse Gas Measurement and Management

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Inducing Low-Carbon Investment in the Electric Power Industry Through a Price Floor for Emissions Trading

Brauneis¹,

Loretz²,

Mestel³

et al. 2011

SSRN Journal

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SummaryUncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter investments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon "dirty" technology to a low-carbon "clean" technology. Using Monte Carlo simulation and dynamic programming techniques for real market data, we determine the optimal CO2 price floor level and growth rate in order to induce investments into the low-carbon technology. We show these findings to be robust to a large variety of input parameter settings. Keywords AbstractUncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter investments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon "dirty" technology to a low-carbon "clean"technology. Using Monte Carlo simulation and dynamic programming techniques for real market data, we determine the optimal CO 2 price floor level and growth rate in order to induce investments into the low-carbon technology. We show these findings to be robust to a large variety of input parameter settings.

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Assessing the value of price caps and floors

Cited by 4 publications

References 5 publications

Using an Allowance Reserve to Manage Uncertain Costs in a Cap-and-Trade Program for Greenhouse Gases

Using an Allowance Reserve to Manage Uncertain Costs in a Cap-and-Trade Program for Greenhouse Gases

Navigating Canada's greenhouse gas policy landscape: a comparison of carbon market mechanisms in the oil and gas sector

Inducing Low-Carbon Investment in the Electric Power Industry Through a Price Floor for Emissions Trading

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