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Uncertainty, Risk and Investment and the NZ ETS

Author

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  • Suzi Kerr

    (Motu Economic and Public Policy Research)

  • Catherine Leining

    (Motu Economic and Public Policy Research)

Abstract

New Zealand is facing a challenging low-emission transition, and effective emission pricing needs to be part of the solution. In its pure form, an emissions trading system (ETS) fixes the quantity of emissions in regulated sectors and the market sets the emission price. In New Zealand’s current policy and market context, there is value in managing both unit supply and emission prices under the NZ ETS. While emission price changes in response to policy and market conditions are desirable to drive efficient abatement, excessive price instability can deter low-emission investment. This working paper, which evolved under Motu’s ETS Dialogue process from 2016 to 2018, explores key considerations for emission price management in the context of a specific working model for unit supply in the NZ ETS. Emission price instability can be reduced at its source by reinforcing policy commitment and improving market regulation and development. Emission price instability can be mitigated by incorporating a price ceiling (cost containment reserve backed by a fixed-price option) and a price floor (auction reserve price) into the auction mechanism. Decisions on price management should be coordinated with other decisions affecting unit supply, guided by an indicative ten-year trajectory for both unit supply and emission prices, and informed by independent advice. Two companion working papers address interactions between ETS price management and the choice of cap and linking to overseas markets. The three working papers elaborate on an integrated proposal for managing unit supply, prices, and linking in the NZ ETS that was presented in Kerr et al. (2017).

Suggested Citation

  • Suzi Kerr & Catherine Leining, 2019. "Uncertainty, Risk and Investment and the NZ ETS," Working Papers 19_08, Motu Economic and Public Policy Research.
    • Handle: RePEc:mtu:wpaper:19_08
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    File URL: https://motu-www.motu.org.nz/wpapers/19_08.pdf
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Wood, Peter John & Jotzo, Frank, 2011. "Price floors for emissions trading," Energy Policy, Elsevier, vol. 39(3), pages 1746-1753, March.
    3. Suzi Kerr & Catherine Leining, 2019. "Paying for Mitigation: How New Zealand Can Contribute to Others’ Efforts," Working Papers 19_09, Motu Economic and Public Policy Research.
    4. Steffen Brunner & Christian Flachsland & Robert Marschinski, 2012. "Credible commitment in carbon policy," Climate Policy, Taylor & Francis Journals, vol. 12(2), pages 255-271, March.
    5. Jakob, Michael & Brunner, Steffen, 2014. "Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy," Strategic Behavior and the Environment, now publishers, vol. 4(3), pages 291-310, August.
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    Cited by:

    1. Suzi Kerr & Catherine Leining, 2019. "Paying for Mitigation: How New Zealand Can Contribute to Others’ Efforts," Working Papers 19_09, Motu Economic and Public Policy Research.

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    More about this item

    Keywords

    Emissions trading; New Zealand Emissions Trading Scheme; greenhouse gas; climate change mitigation; price ceiling; price floor;
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