In general, it argues that the more “bells and whistles” included in carbon market design e.g. strategic reserves, trigger prices, offsets, banking, borrowing, free allocations, the more chances there are to game the system. Therefore, a prudent rule of thumb is to design carbon markets to be as simple as possible. It goes on to say that carbon markets should be large enough to satisfy the environmental objective of the system, but not so large that they become simply another way that financial speculators can make money off of money. Excessively large markets are harder to regulate, and can create systemic risks without providing proportional policy benefits. A managed price approach, in combination with principles of simple market design (i.e. prohibiting offsets, free allowance allocations, and banking/ borrowing) would not only reduce opportunities for gaming, but keep the size of the carbon markets manageable. In addition, adopting this hybrid approach, with its predictable and stable carbon prices, would incentivize more rapid and significant investments in low carbon technologies and infrastructure, thus addressing a structural weakness in emissions trading schemes.
The report also concludes that policymakers must take a realistic view of how even the most robust regulatory regimes developed today will erode in effectiveness over time as they are whittled away.
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