Carbon price floors and low-carbon investment: A survey of German firms. (October 2022)

• Record Type: Journal Article
• Authors: Ohlendorf, Nils; Flachsland, Christian; Nemet, Gregory F.; Steckel, Jan Christoph
• Is Part Of: Energy policy. Volume 169(2022)
• Publication Date: 2022-10
• Subjects: Carbon pricing -- EU ETS -- Investment decisions; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2022.113187
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: Introducing a price floor in emissions trading schemes (ETS) theoretically stabilizes expectations on future carbon prices and thus fosters low-carbon investment. Yet, ex post evidence on high carbon prices is scant and the relevance of carbon pricing for investment decisions is frequently contested. We provide empirical ex ante evidence on how a price floor in the EU ETS would impact the size and portfolio of energy firms' investments. Analyzing survey responses of high-level managers in 113 German energy and industry companies, we find that the level of the price floor is crucial. A low price floor trajectory only provides insurance against downward price fluctuations and would leave investments largely unchanged except for industries receiving electricity price compensation, which reduce their investments. A high floor, significantly increasing the price level beyond current expectations, leads to higher investment by the majority of firms, especially by green firms, while investment in fossil energy would partially be abolished. Our studies implies that price floors can be important design components of ETS. However, policymakers need to ensure that they are at sufficiently high levels to affect investment decisions in a meaningful way. Highlights: Investment decisions of companies under low and high ETS carbon price floor. Survey responses of 113 of high-level managers in German energy and industry companies. Level and portfolio of investments with low price floor largely unchanged. High floor above price expectations increases investment level. Investments of green firms increases, fossil investments are reduced.