![]() ![]() Mechanisms that promote both flexibility and certainty of the carbon price are fundamental to ensure that emissions trading systems can respond to unforeseen or unintended impacts, whether stemming from companion policies or external factors, such as sudden economic downturns. The certainty of the allowance price is a key element of emissions trading system effectiveness in driving decarbonisation in all economic sectors. This section examines experiences in various jurisdictions to shed a light on how to best manage these interactions in different contexts. It is therefore important to understand how emissions trading systems and other policies interact to ensure that together they enable the jurisdiction to meet its mitigation objectives. This applies to both absolute and intensity-based caps.Īn emissions trading system can also sit within a country’s overarching, economy-wide climate change mitigation objective, including a nationally determined contribution (NDC) under the UNFCCC, or a long-term mitigation strategy. Importantly, the waterbed effect can also result in no net emissions reductions since the overall emissions level (cap) remains unchanged. This can reduce allowance demand and, in turn, allowance price. The “waterbed effect” is the phenomenon where emissions reductions induced by companion policies take place under an emissions trading system cap. However, companion policies can also have unintended effects on the carbon price and functioning of an emissions trading system. Enabling business and investment decisions in favour of low-carbon assets alongside an effectively functioning emissions trading system, where the carbon price is not sufficiently high, visible or predictable to shift action (e.g. renewable energy support policies).Promoting long-term technology changes that may not reduce emissions in the short term but are needed to stay on track for the long-term clean energy transition (e.g. investing in storage technologies to support integration of high shares of renewables).Pursuing environmental policy goals beyond emissions reductions (e.g. decreasing air pollution).Overcoming market barriers that make carbon price signals less effective (e.g. non-financial barriers to energy efficiency uptake).Other policies can support and complement an emissions trading system by: ![]() The interaction of an emissions trading system with these policies can accelerate or hinder clean energy transitions, depending on the role the system is meant to play within the policy mix, and the impact other policies may have on its functioning. Carbon pricing policies are implemented alongside a wide mix of other companion policies that aim to drive clean energy transitions. ![]()
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