FEEM working papers "Note di lavoro" series
2019 .016

Emissions Markets with Price Stabilizing Mechanisms: Possible Unpleasant Outcomes


Authors: Paolo Casini, Edilio Valentini
Series: Economics for Sustainability
Editor: Sergio Vergalli
Keywords: Carbon Markets, Price Stabilizing Mechanisms, Macroeconomic Recession
JEL n.: Q5, Q55

Abstract

There is a large consensus that low levels of carbon price cannot provide adequate incentives to invest in cleaner technologies and abate emissions. Since carbon demand and price tend to decrease during recessions, economists and policy makers have proposed different types of price stabilizing mechanisms (PSM) for emissions markets to prevent carbon price from falling too low. We investigate the effects of a PSM on investments and emissions and show that when unfavorable macroeconomic conditions reduce emissions, adjusting the supply of allowances to sustain their price may inhibit investments. Moreover, when firms invest in an integrated abatement technology, not only can emissions increase - an effect previously examined in the literature - but a PSM can exacerbate this effect when an exogenous negative shock curbs the demand of carbon.

***

Suggested citation: Casini, P., E. Valentini, (2019), 'Emissions Markets with Price Stabilizing Mechanisms: Possible Unpleasant Outcomes', Nota di Lavoro 16.2019, Milano, Italy: Fondazione Eni Enrico Mattei.

Download file
Download PDF file

FEEM Newsletter

Subscribe to stay connected.

Your personal data will be processed by Fondazione Eni Enrico Mattei. – data Controller – with the aim of emailing the FEEM newsletter. The use of Your email address is necessary for the implementation of the newsletter service. You are invited to read the Privacy Policy in order to obtain additional information about the protection of Your rights.

This Website uses technical cookies and cookie analytics, as well as “third party” profiling cookies.
If you close this banner or you decide to continue navigating on this Website, you express consent to the use of cookies. If you need additional information or you wish to express selective choices on the use of cookies, please refer to the   Cookie PolicyI agree