This report, written by the International Carbon Action Partnership (ICAP) in conjunction with the Mercator Research Institute on the Global Commons and Climate Change, as well as Resources for the Future, looks at market and regulatory imperfections that could disrupt the dynamic cost effectiveness of an ETS, including options as to how these imperfections can be addressed. The economic rationale for an ETS is to achieve emissions reductions at the least cost. However, inherent market and regulatory imperfections in the ETS market, such as myopia or uncertainty about the ETS’ long-term viability can undermine the cost effectiveness of emissions trading. Accordingly, it also explores possible options to address these shortcomings, including: tools to manage the allowance market; long-political commitments and building constituencies in favor of emissions trading.
