Global price for carbon - medium or longer term perspective?
Monday, 12 March 2012 07:14

Is there a global price for carbon? Today the answer seems obvious - it isn't.
Moreover, throughout the world there are radically divergent approaches to the issue of the very existence of the need for carbon pricing, the concrete price-setting mechanisms not to mention.
In order to outline the issue posed in the title there should be considered in the  first place the regulatory mechanisms for carbon floor and ceilings available in currently deployed schemes in California and Australia as the opposite to the entirely - up to now - market-based system functioning in the EU.

More international, in the principle, units are CERs and ERUs and their price becomes these days oddly interlinked with the price for national allowances (see for instance for Australia 'Will the Australia’s carbon price floor influence on the prices for international units?').

AUSTRALIAN PRICE FLOOR

In the newest cap-and-trade scheme - the Australian -  the reserve price is the lowest price that carbon units would be sold at the auction and it will be set for each auction at a level below the expected market clearing price for the auction.

As part of the price floor arrangements for the first three years of the flexible price period  under the Australian cap-and-trade it is proposed that there will be a minimum auction reserve for the vintage years 2015-16, 2016-17 and 2017-18 (respectively 15, 16 and 17.05 Australian dollars).

For auctions of units that are not subject to the above-mentioned legislative price floor, it is proposed that the Regulator will determine the reserve price for each auction having regard to elements included in the legislative instrument. The reserve price for the said auctions will be determined and published at least 14 days before the relevant auction.

Additionally, in the fixed price period - from 1 July 2012 till 30 June 2015 - the price in the Australian scheme is established by the law and fluctuates from 23 Australian dollars at the beginning to 25.40 at the end of the fixed period. It could easily be noted that in the future transition from fixed to flexible price period (i.e. from 30 June 2015 to 1 July 2015) there is a potential for the carbon price drop from $28 to $15 per tonne.

Very insightful analysis in that regard can be found in 'Carbon price over $10 makes no sense' by Warvick McKibbin (published in the Australian Financial Review 07.03.2012). The author notes that in the Australian cap-and-trade scheme 'the policy in 2015 will switch from a fixed carbon price at about $25 per tonne (in 2012 prices) or $28 in 2015 prices to a carbon trading system with a floor price of $15 per tonne in 2015 prices and no effective ceiling price. Most of the economics literature in this area focuses on imposing an effective ceiling price to bind the economic costs close to the expected benefits.'

He also underlines that, 'The starting price of $23 per tonne of CO2 was partly based on the idea that this would be close to the world price on July 1, 2012. Who knows what that price will actually be on the starting date, less than four months from now, but now the price varies around $6 to $9 per tonne.
Thus Australia is in danger of introducing a carbon price between three and four times the world price.'

The said author generally admits that the combination of a floor and ceiling price reduces the volatility and hence the uncertainty in the expected price, however, he poses a question, what happens in the Australian cap-and-trade scheme and the Australia's economy, if the world price in 2015 is below the floor price. Australia will have a carbon price of about $28 on June 30, 2015, which would fall to $15 per tonne on July 1, 2015.'
After having read the above considerations I really had a reflection that EU ETS cap-and-trade design without fixed prices, floors and ceilings - thus more market-based - potentially could have some merits. The current price depression notwithstanding, however being the immanent feature of the free interactions of the forces of the demand and supply.


 

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