Managing Volatility in a Cap-and-Trade System
Many jurisdictions, including Australia and the United States, have explored the possibility of a carbon bank. A carbon bank is an independent body, separate from political influence, responsible for oversight and management of the carbon market. This policy brief explores the role and functioning of a carbon bank, established by government as part of a cap-and-trade policy.
Key Messages:
- While an emissions trading system is regarded as an economically efficient mechanism to facilitate the transition to a low-carbon economy, price volatility can undermine the system’s ability to meet its economic and environmental goals.
- Experience - such as that of the European Union Emissions Trading Scheme (EU ETS) - has shown that emissions trading systems face a number of challenges related to the perceived stability of the system, particularly price volatility.
- To maintain confidence in the system and ensure manageable compliance costs, price volatility in a cap-and-trade system must be minimized and managed. This policy brief explores the role of a potential “carbon bank,” to be established by government as part of its cap-and-trade policy, which can intervene in the carbon market to ensure price stability, minimize manipulation and speculation, and provide market oversight.
