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Summary for policy makers - Emissions trading and electricity sector regulation

A conceptual framework for understanding interactions between carbon prices and electricity prices

2 Apr 2018

Emissions trading systems (ETSs) as a cost-effective instrument for emissions control in the power sector are now being implemented or considered across a diverse set of jurisdictions. However, regulation in the power sector may impede or alter the functioning of an ETS. In this paper, we consider opportunities and constraints for abatement in diverse power-sector regulation settings, from liberalized markets to highly planned systems to better understand what role an ETS might play under differing regulatory structures, and furthermore, to understand the instances where regulation may create a barrier to abatement. Options to strengthen an ETS and overcome hurdles resulting from regulation are discussed.

For an ETS to achieve emission reductions at least cost, markets ideally must function freely. This requires the ETS allowance costs to be reflected in the price of carbon intensive goods and economic entities are able to adjust their economic operations and investment decisions accordingly. The ability of covered entities to pass through some of the allowance cost to consumers is also fundamental for triggering abatement along the value chain, recouping the costs of long-term low carbon investments and enhancing the credibility of future emission reduction targets.1 Furthermore, to be fully effective, emissions markets must be designed in a way that encourages trade and price discovery to send a clear signal on the value of abatement.

APO Editor's note: 
This report is a summary for policy makers, the full report is available
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