Wednesday, December 17, 2008

IEA touts price floors and ceilings

IEA released a new paper IEA paper link on price caps and price floors in climate policy, assessing long-term economic and environmental effects of introducing price caps and price floors in hypothetical climate change mitigation architecture, which aims to reduce global energy-related CO2 emissions by 50% by 2050. Based on abatement costs in IPCC and IEA reports, this quantitative analysis confirms what qualitative analyses have already suggested: introducing price caps could significantly reduce economic uncertainty. This uncertainty stems primarily from unpredictable economic growth and energy prices, and ultimately unabated emission trends. In addition, the development of abatement technologies is uncertain.

With price caps, the expected costs could be reduced by about 50% and the uncertainty on economic costs could be one order of magnitude lower. Reducing economic uncertainties may spur the adoption of more ambitious policies by helping to alleviate policy makers' concerns of economic risks. Meanwhile, price floors would reduce the level of emissions beyond the objective if the abatement costs ended
up lower than forecasted.

If caps and floors are commensurate with the ambition of the policy pursued and combined with slightly
tightened emission objectives, climatic results could be on average similar to those achieved with "straight" objectives (i.e. with no cost-containment mechanism).

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