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Abstract
The merits of floor prices in emissions trading schemes (ETS) depend on the problem
addressed. Traditional hybrid approaches emphasise automatic response to lower than
anticipated abatement costs, but we find adjusting emissions targets over time is the
better way to deal with this in the context of climate policy. We find, however, that a
price floor is well suited to addressing policy generated carbon price risk as domestic and
international policy frameworks mature, reducing the risk of unintended low carbon
prices. Reducing such downside risk can encourage cost effective investment in lowemissions
assets that might otherwise be precluded by perceived policy risks, even if the
price floor is never actually triggered. In Australia’s planned ETS, a price floor could
support investments that lower the national emissions trajectory, and boost policy
stability and credibility. A price floor in operation can increase the static costs of
achieving a given emissions target, but reduce economic costs over time. Assessment of
implementation options suggests a domestic reserve price for auctioned permits along
with a periodically adjusted fee on the conversion of international permits for use in the
domestic ETS. This approach minimises administrative complexity and avoids arbitrary
interventions in carbon markets.