Premium
Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme
Author(s) -
Abrell Jan,
Rausch Sebastian,
Yonezawa Hidemichi
Publication year - 2019
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12279
Subject(s) - emissions trading , economics , european union , welfare , climate policy , marginal cost , international economics , econometrics , greenhouse gas , microeconomics , monetary economics , market economy , ecology , biology
In this paper, we examine the introduction of a price floor in an emissions trading system (ETS) when some emissions are regulated outside the ETS. We theoretically characterize the conditions under which a price floor enhances welfare. Using a numerical simulation model of the European Union (EU), we find that moderate minimum prices in the EU ETS can reduce the costs of EU climate policy by up to 30 percent. We also find that, because of tax‐interaction effects, the optimal minimum price in the EU ETS should be about four times higher than the average marginal abatement cost in non‐ETS sectors.