The new publication from the agency assesses the impact of the European Trading Scheme on the German and Polish electricity sector and market.
One of the main conclusions of the report is that volatile carbon prices are an indicator that a market is able to react to newly revealed information. Yet, excessive volatility makes it difficult for market participants to make abatement and trading decisions. Therefore predictability of the prices is also needed, because investors have a planning horizon of several years.
So the long-term predictability of the price signal is essential to foster low carbon investments.
In theory, a major driver of predictability is the existence of a reliable long-run target which allows to better predict long-term prices. In reality though the market tends to be rather shortsighted.
The other takeaway is that existing production mix determines the reaction to carbon prices. Higher average age of power plants – like in Poland – likely means a lower efficiency and a bigger impact from carbon price. This also means that a higher price will more likely trigger a divestment decision in case of such a mix.
And finally we must not forget about additional policies and their role. The report concludes that additional policies such as incentives that support renewable and CHP technologies also influence investment decisions. And as a result they reduce the role of carbon prices.
The full report can be found on the website of the Agency.