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

Authors

Abrell, Jan
Rausch, Sebastian
Yonezawa, Hidemichi

Keywords

Emissions trading; EU ETS; general equilibrium; partitioned regulation; price floors