IDEAS home Printed from https://ideas.repec.org/a/taf/tcpoxx/v9y2009i1p9-21.html
   My bibliography  Save this article

Commitments through financial options: an alternative for delivering climate change obligations

Author

Listed:
  • ROLAND ISMER
  • KARSTEN NEUHOFF

Abstract

Governments willing to commit themselves to maintain carbon prices at or above a certain level face the challenge that their commitments need to be credible both for investors in low-carbon technology and for foreign governments. This article argues that governments can make such commitments by issuing long-term put option contracts on the price of CO 2 allowances. This mechanism gives investors the right, but not the obligation, to sell allowances to the government at the strike price. From the investors' point of view, a government is therefore fully committed to a price floor for allowances in the future. This proposed approach alters the incentives that a government faces when considering noncompliance and serves to prevent non-compliance. The proposal fares well when assessed against criteria to determine its suitability in legitimacy, enforcement, proportionality, lack of interference from other contracting States, and transparency. It also allows for fine-tuning through the number and duration of issued options and the strike price. A robust contract structure is proposed to protect against government interference that might threaten the credibility of commitments.

Suggested Citation

  • Roland Ismer & Karsten Neuhoff, 2009. "Commitments through financial options: an alternative for delivering climate change obligations," Climate Policy, Taylor & Francis Journals, vol. 9(1), pages 9-21, January.
    • Handle: RePEc:taf:tcpoxx:v:9:y:2009:i:1:p:9-21
    DOI: 10.3763/cpol.2008.0358
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.3763/cpol.2008.0358
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.3763/cpol.2008.0358?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fankhauser, Samuel & Hepburn, Cameron, 2010. "Designing carbon markets. Part I: Carbon markets in time," Energy Policy, Elsevier, vol. 38(8), pages 4363-4370, August.
    2. Fankhauser, Samuel & Hepburn, Cameron, 2009. "Carbon markets in space and time," LSE Research Online Documents on Economics 37606, London School of Economics and Political Science, LSE Library.
    3. Olga Chiappinelli & Karsten Neuhoff, 2020. "Time-Consistent Carbon Pricing: The Role of Carbon Contracts for Differences," Discussion Papers of DIW Berlin 1859, DIW Berlin, German Institute for Economic Research.
    4. Hertwich, Edgar, 2020. "Carbon fueling complex global value chains tripled in the period 1995-2012," SocArXiv zb3rh, Center for Open Science.
    5. Taran Fæhn & Elisabeth T. Isaksen, 2016. "Diffusion of Climate Technologies in the Presence of Commitment Problems," The Energy Journal, , vol. 37(2), pages 155-180, April.
    6. Alistair Ulph & David Ulph, 2013. "Optimal Climate Change Policies When Governments Cannot Commit," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(2), pages 161-176, October.
    7. Hertwich, Edgar G., 2020. "Carbon fueling complex global value chains tripled in the period 1995–2012," Energy Economics, Elsevier, vol. 86(C).
    8. Alistair Ulph & David Ulph, 2011. "Optimal Climate Change Policies When Governments Cannot Commit," Discussion Paper Series, School of Economics and Finance 201104, School of Economics and Finance, University of St Andrews.
    9. Taran Faehn and Elisabeth T. Isaksen, 2016. "Diffusion of Climate Technologies in the Presence of Commitment Problems," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    10. Bing Zhang & Hanxun Fei & Yongjing Zhang & Beibei Liu, 2015. "Regulatory Uncertainty and Corporate Pollution Control Strategies: An Empirical Study of the ‘Pay for Permit’ Policy in the Tai Lake Basin," Environment and Planning C, , vol. 33(1), pages 118-135, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:tcpoxx:v:9:y:2009:i:1:p:9-21. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/tcpo20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.