Weitzman meets Taylor: EU allowance price drivers and carbon cap rules

Benmir, Ghassane, Roman, Josselin and Taschini, Luca ORCID: 0000-0001-5355-1736 (2025) Weitzman meets Taylor: EU allowance price drivers and carbon cap rules. Grantham Research Institute on Climate Change and the Environment Working Papers (421). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

Text (working-paper-421-Benmir-Roman-et-al) - Published Version Download (1MB)

• https://www.lse.ac.uk/granthaminstitute/...

Abstract

Using a two-sector structural model, we identify abatement, energy prices, transition demand for permits, and regulatory supply shocks as the key drivers of permit prices in the third phase of the EU Emission Trading System (ETS). Through an innovative approach, we estimate unobservable abatement shocks and quantify the contribution of each factor to carbon price variability, which we find t o b e approximately eighty times greater than it would be under an optimal carbon pricing scenario aligned with the social cost of carbon. To address this, we propose the Carbon Cap Rule (CCR) – a rule-based cap adjustment mechanism that dynamically responds to deviations in emissions and abatement costs. The CCR reduces volatility by 55% compared to the current EU ETS cap, and cuts welfare losses in consumption equivalence terms by 40%.

Item Type:	Monograph (Working Paper)
Official URL:	https://www.lse.ac.uk/granthaminstitute/publicatio...
Additional Information:	© 2025 The Author(s)
Divisions:	Economics Grantham Research Institute
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Date Deposited:	23 Jun 2025 10:45
Last Modified:	23 Jun 2025 23:15
URI:	http://eprints.lse.ac.uk/id/eprint/128515

Actions (login required)

View Item