Overlapping Climate Policies

Abstract

We present an integrated framework to understand the emissions impact of unilateral overlapping policies within a carbon-pricing system. \Internal carbon leak-age" captures emissions displacement within the system (e.g., due to greater product imports from a neighbouring country). The waterbed effect captures the policy's interaction with the system's overall emissions cap. Current market rules in the reformed EU ETS, California's carbon market and RGGI feature \punctured" waterbeds that allow overlapping policies to affect aggregate emissions. We present simple formulae to estimate internal carbon leakage for different types of policy such as a carbon price floor (perhaps with a border tax adjustment), an energy efficiency program, and renewables support. The sign and magnitude of the climate benefit from an overlapping policy varies widely depending on its design, location and timing. Punctured waterbeds raise the stakes: well-designed overlapping policies can be much more climate-effective but others now backfire. Cambridge Working Papers in Economics Faculty of Economics www.eprg.group.cam.ac.uk

Reply: EU ETS and the waterbed effect

“…The extensions put forward by Rosendahl that concern the time between these phases are plausible and justified. They reinforce the more general point that timing of abatement matters greatly in the reformed EU ETS 1,[3][4][5] .…”

Waterbed leakage drives EU ETS emissions: COVID-19, the Green Deal & the recovery plan

“…Because of the punctured waterbed, the effect of overlapping policies on cumulative emissions -waterbed leakage -is not obvious and depends on the year the policies are announced, the time profile of their effect on emissions, and the year in which the waterbed is sealed (Beck and Kruse, 2020;Bruninx et al, 2019;Gerlagh and Heijmans, 2019;Gerlagh et al, 2020b;Perino et al, 2020;Rosendahl, 2019a). Figure 1 presents a graphical summary of waterbed leakage depending on two of the above three dimensions: the year in which the overlapping policy reduces emissions on the horizontal axis and the year in which the waterbed is sealed on the vertical axis -assuming that the policy is announced in 2020.…”

“…All actions that are announced before they take place will have an effect on the TNAC, irrespective of when the waterbed is sealed again, because of an indirect effect of expectations through adjustments of the price profile (Bruninx et al, 2019;Gerlagh et al, 2020b;Perino et al, 2020;Rosendahl, 2019a). For example, when a future action announced today, like a coal plant closure, is expected to increase the total number of allowances in circulation at some point in the future, market participants expect the future price of allowances to drop.…”

The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis

“…These perverse interactions, frequently characterized as the "waterbed effect" in the European context (Fankhauser, Hepburn, and Park 2010;Perino 2018), may be partially alleviated by planned reforms employing "market stability reserves" in the EU ETS, California, and RGGI (Edenhofer, et al 2017;Perino, Ritz, and van Benthem 2019).…”