Emissions Trading and the Role of a Long Run Carbon Price Signal

The question of how emissions trading systems (ETS) can provide a carbon price signal that incentivizes cost-effective emissions abatement over the long term is key to the instrument’s contribution to tackling climate change. In this paper, we discuss a framework to understand dynamic cost effectiveness under an ETS and map options to address market and regulatory imperfections in emissions trading. Specifically, the paper focuses on tools to manage the allowance market; commitments to long term targets, as well as how jurisdictions can create constituents that have an active interest in supporting and strengthening ETS.