In May 2018, ICAP published “Emissions Trading and Electricity Sector Regulation” at Innovate4Climate.

The paper, led by ICAP, in cooperation with the International Institute for Sustainable Development (IISD) and Felix Matthes explores the interaction between emissions trading and different forms of electricity sector regulation. While in theory ETS offers a cost-effective tool to achieve emissions reduction targets, in practice, different forms of electricity sector regulation interact with emissions trading in ways that may challenge its effectiveness. Here a conceptual framework to understand the interaction between allowance prices and electricity prices under different power-sector regulation settings is developed, from liberalized markets to highly regulated systems. The framework identifies where regulation might disrupt the proper functioning of an ETS and identifies options for restoring the mitigation incentive. Options to overcome regulatory barriers as well as the role of companion policies are also discussed.

The full version of the paper can be downloaded here.

The summary for policymakers can be downloaded here