Reinforcing carbon markets under uncertainty

The document analyzes the 'boom and bust' pattern of carbon prices in emissions trading schemes, attributing it to fixed supply facing highly uncertain demand and asymmetric information. It argues that price collapses undermine low-carbon investment and economic efficiency. While rejecting carbon taxation as a viable alternative due to political and implementation hurdles, the author proposes several policy options to stabilize markets, highlighting reserve price auctions in the EU ETS as a feasible, low-complexity mechanism to reduce supply automatically if prices fall too low.

• Carbon markets, such as the EU ETS and US RGGI, exhibit a recurring 'boom and bust' pattern where high prices are followed by dramatic declines, often reaching virtually zero, which undermines their ability to deliver environmental policy objectives.
• The volatility in carbon prices is driven by a market structure where supply is almost completely fixed, while demand is highly uncertain due to modest allocation cutbacks relative to projected emissions and biases caused by asymmetric information and lobbying.
• The EU ETS Phase II faced a 'perfect storm' of factors driving prices down, including high energy prices in 2008 that spurred energy efficiency, an economic downturn that reduced industrial emissions, a surge in CDM project supply, and a credit crunch that deterred the banking of allowances.
• Price collapses in carbon markets negatively impact four key policy goals: they deter low-carbon investment due to political uncertainty, reduce economic efficiency, disrupt stable resource flows to developing countries, and signal that initial emission targets were too weak.
• Carbon taxation is dismissed as an inferior alternative to emissions trading because it combines price-setting with large-scale revenue transfers, making it politically constrained and difficult to implement harmoniously, as seen in European experiences between 1990 and 1995.
• Reserve price auctions are proposed as a feasible mechanism to stabilize the EU ETS because they allow supply to adjust automatically if prices fall, are within the control of a few Member States (primarily the UK and Germany), and are consistent with existing legal structures.

APA

Grubb, M. (2009). Reinforcing carbon markets under uncertainty. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/reinforcing-carbon-markets-under-uncertainty.pdf

Chicago

Grubb, Michael. Reinforcing carbon markets under uncertainty. Climate Strategies, 2009. https://climatestrategies.org/wp-content/uploads/2014/11/reinforcing-carbon-markets-under-uncertainty.pdf.

Wikipedia

{{cite report |last1=Grubb |first1=Michael |title=Reinforcing carbon markets under uncertainty |publisher=Climate Strategies |date=4 March 2009 |url=https://climatestrategies.org/wp-content/uploads/2014/11/reinforcing-carbon-markets-under-uncertainty.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{grubb2009reinforcing, author = {Grubb, Michael}, title = {{Reinforcing carbon markets under uncertainty}}, institution = {Climate Strategies}, year = {2009}, month = mar, url = {https://climatestrategies.org/wp-content/uploads/2014/11/reinforcing-carbon-markets-under-uncertainty.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }