Robert M. La Follette School of Public Affairs

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La Follette Seminar Series: The Effect of Carbon Emissions Pricing on Low-Carbon Investment

Wednesday, February 26, 2020, 12:30pm - 01:30pm
Location:  La Follette School Conference Room, 1225 Observatory Drive

La Follette School Professor Greg Nemet will discuss the potential impact of a floor price in emissions trading schemes (ETS), which theoretically could stabilize expectations on future carbon prices and thereby foster investment.

However, knowledge about the impact of a floor price on investment decisions remains largely theoretical, and in policy discussions, the relevance of carbon pricing for investment decisions is often contested.

Nemet and colleagues addressed this empirical shortcoming by surveying managers of 141 German electricity and energy-intensive companies on the way in which a price floor in the European Union (EU) ETS would affect their investment decisions.

They found that whether companies increase their investment volumes depends on the level of the floor price trajectories. A low floor price trajectory of $23 (EUR 20) in 2020 and $46 (40 EUR) in 2030 would leave investment largely unchanged. Those decreasing their investment are mainly EU ETS companies receiving an electricity price compensation. 

By contrast, a high floor price trajectory that rises from $46 in 2020 to $94 in 2030 would trigger increasing investment for almost 50 percent of companies. Green companies and companies with more uncertain EU allowance price expectations are particularly responsive to the high floor price.

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