Emission pricing price volatility

The key difference between the EU ETS and other trading programmes is that the cutbacks negotiated have been well within the range of projection uncertainty. This inevitably creates price volatility if, as has been the case before, emissions turn out to be lower than the projected basis upon which allocations are made. 

Auctioning may also provide a hedge against projection uncertainties, reduce price volatility, and increase investor stability. The recent EU ETS market collapse is a dramatic manifestation of uncertainty in emission projections. Reserving some allowances for periodic auctions ... 

Price volatility Businesses tend to prefer low price volatility because it allows them to better plan their sustainability activities. A carbon tax fixes the price of emissions, whereas a cap-and-trade system displays price volatility. A hybrid cap-and-trade Systran limits price... 

The European Union emission trading scheme saw a lot of price volatility in Phase 1. Many academics pointed out that much of the price volatility occurred because the program prevented the banking of allowances from the first phase to the second. Discnss why the banking of allowances over time may rednce price volatility in a cap-and-trade scheme. 

The scale of the EU ETS, combined with the relative difficulty of reducing C02 emissions compared to many other pollutants, has two immediate consequences cutbacks imposed in phase I - and under discussion for phase II - have been small and prices have been volatile. Cutbacks in phase I of EU ETS... 

In these scenarios, if the government were to take aggressive action immediately, the impacts and risks would play out differently with a big-problem future than they would with a no-problem future. If the government were to take aggressive action in a big-problem future, then it would have already taken measures to reduce emissions, local impacts would be less, and oil consumption would be reduced, which means that volatility in prices would have a smaller impact. On the other hand, in a no-problem future, there are likely to be some investments in technologies that are not used or are not cost-effective, and investments made in hydrogen would have less of a payoff than investments made elsewhere. 

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