In this paper, we examine the introduction of a price ﬂoor in an emissions trading system (ETS) when some emissions are regulated outside the ETS. We theoretically characterize the conditions under which a price ﬂoor enhances welfare. Using a numerical simulation model of the European Union (EU), we ﬁnd that moderate minimum prices in the EU ETS can reduce the costs of EU climate policy by up to 30 percent. We also ﬁnd that, because of tax-interaction effects, the optimal minimum price in the EU ETS should be about four times higher than the average marginal abatement cost in non-ETS sectors.
Abrell, Jan, Sebastian Rausch and Hidemichi Yonezawa (2019), Higher Price, Lower Costs? Minimum Prices in the EU Emissions Trading Scheme, The Scandinavian Journal of Economics 121(2), 446-481. Download