Designing environmental policy for Australia from an economic and social perspective
Dr. Regina Betz
Senior Lecturer at the School of Economics University of New South Wales and Research Coordinator for the Centre of Energy and Environmental Markets (CEEM)
Emissions trading schemes (ETS) are designer markets – governments create and can change the rules. There is an enormous amount of flexibility in the chosen design of such markets and this poses both opportunities yet risks for system designers. It is possible to create extremely complex schemes which might limit or even totally diminish the efficiency gains of the market.
Given the limited experience with ETS to date, there are many unanswered questions about key design issues for maximising their effectiveness. Therefore the aim of this project is to assess different design options and assess their impact on the efficiency and effectiveness of the scheme. The focus will be on the Australian ETS proposals which have been outlined in the report of the Prime Ministers Task Group. The four case studies of the project are as follows:
1st case study: Auctioning versus free allocation: What are the impacts on market efficiency?
In this case study we use economic experiments to test the impacts of different allocation methods on market efficiency. Among other issues, we assess how auctions might improve market efficiency compared to free allocation since they reveal price information and improve market liquidity.
2nd case study: Design of Greenhouse Gas Permit Auctions
In this case study we will focus on auction design features such as: auction type, timing, and frequency of auctions, role of advance auctions and other special design issues (e.g. intra-round bidding).
3rd case study: Penalty design and implications for the efficiency and effectiveness of the trading scheme
In this case study we will investigate the effects of different penalty designs (fixed penalty rate, “make good” provisions, combinations of both) on compliance rate and market efficiency. We also assess if tying the penalty rate to the prevailing permit price (e.g. previous auction clearing price) could improve the efficiency and effectiveness of trading schemes.
4th case study: Linkages among Emissions Trading Schemes
This case study will be part of a joint project under Climate Strategies. We will qualitatively and quantitatively analyse linkage scenarios for Australia with New Zealand and EU ETS.
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