Linking Carbon Supply to Growth Is Complicated, PwC’s Grant Says

Jonathan Grant, director of sustainability and climate change at PricewaterhouseCoopers LLP in London, comments on rule changes being considered to the European Union emissions trading program, in an e-mailed response to questions on Aug. 23.

The European Commission would consider implementing changes to the market’s structure that would cut supply of carbon permits according to an unspecified measure of economic activity, Jos Delbeke, director general for climate at the commission in Brussels, said in a May interview.

On whether market intervention is needed:

“With many market participants expecting carbon to remain in the doldrums until 2020, it is right that the commission is looking at intervention. In the same way that central banks adjust interest rates to manage inflation, a ‘central carbon bank’ could adjust the volume of EU allowances auctioned in response to economic statistics in order to manage the carbon price. However, this is perhaps an unnecessarily complicated way of managing the price. A simpler approach would be to set a higher reserve price in auctions. If the reserve price is not met, the allowances can be withheld and possibly auctioned in later years if the market price is deemed to be too high. In this way the commission could achieve a price corridor. The commission should be transparent about the price objectives, in the same way the U.K. government is about the carbon price floor.”

On how the EU should adjust permit supply:

“Looking at how to adjust the carbon price depending on the level of economic growth is probably sensible. Of course, the market price should fluctuate depending on emissions, but having a reasonable price signal even during the recession will help maintain the incentive to invest in low-carbon options. This may even help prevent assets becoming stranded when carbon prices return to higher levels.”

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