Trading for the Future: Signaling in Permit Markets

Harstad, Bård; Eskeland, Gunnar S.

doi:10.2139/ssrn.1012468

Cited by 15 publications

(14 citation statements)

References 55 publications

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“…If all actors and organisations are rational, a markets and pricing approach, based on sound cost -benefit analysis, will yield efficient resource allocations (Grubb et al, 2014;Styhre, 2014). Within this domain, policy research has typically focused on the pricing of environmental externalities, particularly carbon emissions (Aldy & Stavins, 2012;Baumol, 1972;Ellerman et al, 2010), and the construction of market mechanisms and trading to deal with them (Neuhoff, Grubb, & Keats, 2006;Harstad & Eskeland, 2010).…”

Section: Investment Challenges: First-and Second-domain Perspectivesmentioning

confidence: 99%

Investing in low-carbon transitions: energy finance as an adaptive market

2015

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The amount of capital required to transition energy systems to low-carbon futures is very large, yet analysis of energy systems change has been curiously quiet on the role of capital markets in financing energy transitions. This is surprising given the huge role finance and investment must play in facilitating transformative change. We argue this has been due to a lack of suitable theory to supplant neoclassical notions of capital markets and innovation finance. This research draws on the notion from Planetary economics: Energy, climate change and the three domains of sustainable development, by Grubb and colleagues, that planetary economics is defined by three 'domains', which describe behavioural, neoclassical, and evolutionary aspects of energy and climate policy analysis. We identify first-and second-domain theories of finance that are well established, but argue that third-domain approaches, relating to evolutionary systems change, have lacked a compatible theory of capital markets. Based on an analysis of electricity market reform and renewable energy finance in the UK, the 'adaptive market hypothesis' is presented as a suitable framework with which to analyse energy systems finance. Armed with an understanding of financial markets as adaptive, scholars and policy makers can ask new questions about the role of capital markets in energy systems transitions. Policy relevanceThis article explores the role of financial markets in capitalising low-carbon energy systems and long-term change. The authors demonstrate that much energy and climate policy assumes financial markets are efficient, meaning they will reliably capitalise low-carbon transitions if a rational return is created by subsidy regimes or other market mechanisms. The authors show that the market for renewable energy finance does not conform to the efficient markets hypothesis, and is more in line with an 'adaptive' markets understanding. Climate and energy policy makers that design policy, strategy, and regulation on the assumption of efficient financial markets will not pay attention to structural and behavioural constraints on investment; they risk falling short of the investment levels needed for long-term systems change. In short, by thinking of financial markets as adaptive, the range of policy responses to enable low-carbon investment can be much broader.

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Section: Investment Challenges: First-and Second-domain Perspectivesmentioning

confidence: 99%

Investing in low-carbon transitions: energy finance as an adaptive market

2015

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“…In a similar way, Sterner and Muller (2008) show that if allocation is regularly updated based on prior emissions, firms will have a financial incentive to pollute more. Harstad and Eskeland (2010) show this formally in a dynamic setting, where firms that anticipate the regulator's future desire to give more allowances to firms that appear to need them purchase allowances to signal their need. This raises the price above marginal costs and thus results in an inefficient market outcome.…”

Section: Updating Allocationsmentioning

confidence: 89%

Short-Run Allocation of Emissions Allowances and Long-Term Goals for Climate Policy

Zetterberg

Wråke

Sterner

et al. 2012

Ambio

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We use economic analysis to evaluate grandfathering, auctioning, and benchmarking approaches for allocation of emissions allowances and then discuss practical experience from European and American schemes. In principle, auctions are superior from the viewpoints of efficiency, fairness, transparency, and simplicity. In practice, auctions have been opposed by important sectors of industry, which argue that carbon pricing without compensation would harm international competitiveness. In the European Union's Emissions Trading System, this concern led to grandfathering that is updated at various intervals. Unfortunately, updating gives industry an incentive to change behavior to influence future allocation. Furthermore, the wealth transferred to incumbent firms can be significantly larger than the extra costs incurred, leading to windfall profits. Meanwhile, potential auction revenues are not available to reduce other taxes. By circumscribing free allocation, benchmarking can target competitiveness concerns, incur less wealth transfer, and provide a strategy consistent with transitioning to auctions in the long run.

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“…Examples of treatment of pre-existing distortions exist in the literature (n Bohringer et al, 1990b, for instance), but the fact that gratis quotas may act as distortionary subsidies in emitting industries is often neglected or treated superficially. Harstad and Eskeland (2010) offers analysis demonstrating that the distortionary effects of gratis quotas to an industry like electricity generation may be substantial.…”

Section: Concluding Discussionmentioning

confidence: 99%

Europe’s climate goals and the electricity sector

2012

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EU's objective of attaining 20% reductions in greenhouse gas emissions by 2020 is analysed with a general equilibrium model detailing electricity generation technologies and capital vintaging. Consistent with theory and other analysts we find that the nonuniform treatment of emitting sectors in EU raises abatement costs -by a factor of two to three. Under cost effective emission reductions -a more comprehensive tradable cap -electricity generation abates more than its proportional share in emissions.The European economy abates by substitution towards natural gas, by energy efficiency improvements, and by reductions in emission intensive manufactures. Applied policies such as renewable support -and responses such as carbon leakage -hold down the prices for emission and electricity, thus also incentives for energy efficiency and technological change this leads to little preparation for the future and global mitigation.

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Trading for the Future: Signaling in Permit Markets

Cited by 15 publications

References 55 publications

Investing in low-carbon transitions: energy finance as an adaptive market

Investing in low-carbon transitions: energy finance as an adaptive market

Short-Run Allocation of Emissions Allowances and Long-Term Goals for Climate Policy

Europe’s climate goals and the electricity sector

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