Edenhofer: "A good idea is not a guaranteed success"

Emissions trading systems, such as the EU ETS in Europe, typically deliver very low carbon prices not long after their introduction. This is a systemic problem, say Ottmar Edenhofer, Director of the Mercator Research Institute on Global Commons and Climate Change (MCC), and Axel Ockenfels of the University of Cologne. Their op-ed on effective carbon pricing has been published today in the influential German newspaper “Frankfurter Allgemeine Zeitung”. The problem, the economists argue, could be solved by introducing a minimum price for CO₂.

Compared to certain quantity targets for maximum CO₂ emissions—like in the EU ETS—a minimum price would be easier to coordinate on an international level. But the instrument’s main advantage is that it is more effective than a quantity cap in delivering higher carbon prices, say the authors.

Higher CO₂ prices are needed globally to steer investments into low-carbon assets and push dirty coal-generated energy out of the market. On the other hand, in a mere cap-and-trade system, market participants often expect that policymakers will release the cap in the future in the event of a drastic price increase. Due to these expectations, prices remain low.

In order for climate policy to become more credible, decision-makers should not only focus on ambitious goals, but should also opt for effective tools to achieve these goals. The climate change conference in Bonn has shown that even a good idea like a minimum price for carbon is “not a guaranteed success”. However, it is encouraging that more and more countries and regions around the world are planning to introduce carbon pricing, write Edenhofer and Ockenfels.