Tradable instruments to fight climate change: A disappointing outcome

Abstract

Various tradable instruments have been implemented for climate change mitigation: emission trading systems, tradable energy‐efficiency obligations, and tradable renewable energy quotas. Their track record has been disappointing so far; almost every emission trading has suffered from over‐allocation which has undermined its effectiveness; tradable energy‐efficiency obligations seem to have mostly co‐financed investments that would have taken place anyway; tradable renewable energy quotas suffer from several shortcomings compared to alternative support systems, that is, feed‐in tariffs and premiums. I discuss the reasons for these failures (especially too superficial a reading by policy makers of the work of researchers) and ways to improve the situation (including encouraging systematic syntheses of academic work). This article is categorized under: Climate Economics > Economics of Mitigation

Climate Change Affectedness and Innovation in German Firms

“…One reason for the weak effects of carbon pricing might be that many of the analysed papers used data of the early phases of the ETS when the prices of the certificates were quite low. Quirion (2021) supports this view showing that the problem of over-allocation of permits occurred in nearly all emission trading systems. From a theoretical background, especially in the early transition phase from carbon-intensive technologies to green ones, high price incentives are necessary to overcome lock-in effects in using carbon-intensive technologies, already existing networks and learning curve effects (Lilliestam et al 2021).…”

A Bi-Level Optimization Model for Inter-Provincial Energy Consumption Transfer Tax in China

“…Under the incentive of an economic approach, each subject of energy consumption will more actively choose the optimal method of energy consumption according to their own situation [31]. However, the trading mechanism in economic means in the fight climate change have been disappointing [32,33]. At present, since the market-oriented economic mechanism is in the initial stage, the smooth implementation of the marketoriented economic mechanism needs the support of the government, the formulation of the system and the enthusiasm of the participants [34,35].…”

Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System

“…Considerable technological development is required to put nations on a path towards rapid decarbonization (Rockström et al, 2017). One of the principal objectives of the EU ETS has been to contribute to this transition by encouraging polluters to invest and innovate in low-carbon technologies (European Commission, 2005).…”

“…The decisions in earlier phases to grandfather allowances made national regulators the targets of intense lobbying. Although lobbying was intended mainly to ensure that each firm would have enough allowances to compete, this rent‐seeking exercise ultimately contributed to crippling system‐wide over‐allocation (Quirion, 2021), which depressed CO 2 prices and helped to paralyze the EU ETS for many years. Economists had advised that longer commitment periods would reduce uncertainty for investors, but this backfired as the system lacked the necessary flexibility to address the excess supply of allowances within commitment periods (Grosjean et al, 2016).…”