Several years of experience with the EU ETS and various adaptations of the regulatory framework are accompanied by discussions
whether an institutional setting to stabilise carbon markets is needed. This paper discusses imperfections in market forces
– contrary to theoretical assumptions – especially with respect to the implications of the use of marginal abatement cost
curves as well as the role of stable price signals for investment decisions. We argue that the gap between ex ante information
when emission caps are set and ex post outcomes might be one of the reasons for price variability in the EU ETS. This divergence
between ex ante and ex post information illustrates that the theoretical assumptions on emission trading are not matched by
a real world setting. We conclude that this weakens the potential role of carbon prices for investment decisions. In order
to improve the functioning of the EU ETS we re-iterate the arguments for a carbon authority put forward in the literature
and extend them by the argument that the concept of abatement curves is only of limited value in the context of CO2 emission
reductions where marginal abatement costs often are ambiguous and time variant.
The project "ICPIA – Coping with Complexity in the Evolving International Climate Policy Institutional Architecture" was funded
by the Austrian "Klima- und Energiefonds" and carried out within the research programme "ACRP".
Auftraggeber: Klima- und Energiefonds
Studie von: Österreichisches Institut für Wirtschaftsforschung – Climate Strategies