Module 3 provides a review of international agreements and domestic policies for mitigation climate change. In particular the Kyoto Protocol and the Paris Agreement under the United Nations FrameworkReview Solutions Week 9 ECO3CCE Page 1 CLIMATE CHANGE ECONOMICS AND POLICY Respond: (a) What is the range of carbon prices around the w orld as outlined in the W orld Bank (2015) State and Trends of Carbon Pricing? W hich ju risdiction has the highest price?
What is the average price of carbon? The range of prices is from US$1 t/CO2-e to US$130 t/CO2-e, the highest price is in carbon tax in Sweden. The majority of emissions pri ced around US$10 t/CO2-e (b) What is the main implication of fragmented pric es for carbon?
The main implication is the impact on the competiti ve of firms in jurisdictions with a low (or zero) carbon price compared to those with h igher prices. Depending on the mobility of the firms it potentially provides an in centive for carbon leakage.
(c) Define the concept of carbon leakage. What poli cies can help overcome the risk of carbon leakage?
Carbon leakage potentially occurs if a carbon price on a firm in one jurisdiction increases its costs that firms in other jurisdictio ns do not face, such that they lose either market share, a decrease in profits or both. If it leads to a relocation of production to the jurisdiction without carbon prici ng emissions leakage occurs.
(d) What are the possibilities for linking carbon p ricing instruments, with both implicit and explicit prices? There are a number of scenario for linking carbon p ricing instruments:
1. Linking of ETS directly so that credits are tran sferrable between schemes or indirectly through a third scheme (e.g. CDM) 2. Linking of ETS and carbon tax schemes directly w here a carbon tax credit is created or indirectly through allowance of offsets 3. Linking an ETS and /or carbon tax with regulator y approaches Review Solutions Week 9 ECO3CCE Page 2 (e) What are some of the main advantages and drawbacks of linking carbon pricing instruments? Depending of the degree of price harmonisation it w ill reduce the incentives for carbon leakage, so improves the environmental effec tiveness of carbon pricing instruments. By increasing the number of market par ticipants it increases its spreads the options for reducing emissions at least cost. I t improves the liquidity of carbon markets and would reduce the volatility of prices.