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Interaction between incentives for carbon abatement

Interaction between incentives for carbon abatement. The end of Emissions Trading? A.J. Mulder (arnold.mulder@rug.nl) . Introduction. EU ETS is key incentive to reach deep CO2 reduction in the industry in an cost-effective manner

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Interaction between incentives for carbon abatement

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  1. Interaction between incentives for carbon abatement The end of Emissions Trading? A.J. Mulder (arnold.mulder@rug.nl)

  2. Introduction • EU ETS is key incentive to reach deep CO2 reduction in the industry in an cost-effective manner • Yet, many other ‘parallel incentives’ for carbon abatement are in place • Literature* suggests: merely a more costly substitute of the EU ETS and undermines the carbon price • A quantitative analysis of the full system is needed to better understand interactions with the EU ETS * e.g. Unger and Ahlgren, 2005; Smith and Sorrell, 2001; Sorrell and Sijm, 2004; Rathmann, 2007; De Jonghe et al., 2009; Hepburn, 2006; Morris et al., 2010

  3. Methodology • Stochastic Simulation Model of the EU ETS (Mulder and Jepma, 2013) • Check marginal effect on carbon price and emission level before and after expiration of parallel incentives  Distinguish between two types…

  4. Estimating the combined effect

  5. Methodology • We run multiple scenarios, each time assuming a greater annual impact of either type of parallel incentive: between 0 and 30 MtCO2/yr of abatement (0 - 1,6% per annum) • Simulation horizon is 2030 • Parallel incentives take effect between 2012-2025

  6. Results – Carbon Price • Carbon Price over time assuming 30 MtCO2/yr impact Type 1 Type 2

  7. Conclusion on carbon price • Type 2 incentives have greatest depreciating effect on the carbon price • Type 1 incentives do depreciate the carbon price, but rebound fairly quickly after these incentives have expired/phased-out. •  Low carbon prices could trigger policy-makers to introduce extra parallel incentives!!

  8. Results Complementarity of abatement Sensitivity to Economic Growth Average = 16%

  9. Conclusion on Emissions • Complementarity is generally low (~30%) but can be higher, although this would signal the silent death of emissions trading (if impact > 40 MtCO2/yr). • This treshold level could be lower if economic growth projections are grim • Current market conditions are alarming! (low prices, low economic growth) • Policy-makers could end up in deadly spiral and unwillingly pull the plug on emissions trading

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