Energy economics: The case of emission markets

Energy Systems of TU Berlin – Einsteinufer 25, D-10587, Berlin, Germany
E.ON Energy Research Center, RWTH Aachen – Aachen, Germany

^(*) E-mail: Georg.erdmann@tu-berlin.de
^(**) E-mail: aaron.praktiknjo@rwth-aachen.de

Published online: 16 December 2020

Abstract

The typical proposition of economists to solve the greenhouse gas problem (GHG) is that governments should put a price on these emissions. As human behavior can be influenced by prices, high prices on GHG emissions would imply lowering these emissions. One reaction would be to substitute the burning fossil fuels by non-fossil fuels such as wind, photovoltaics, geothermal and hydropower, eventually nuclear. The second would be innovations towards satisfying human needs by less energy. The third would be to avoid the GHG emissions by carbon capture and storage technologies. However, putting a price on GHG emissions requires political actions. Politicians have basically two alternatives. One would be to introduce a fiscal tax on GHG emissions, whereby the tax rate represents the price of the emission. The other is to implement a cap-and-trade system for GHG emissions, which requires that companies have to cover each emission unit by an emission right issued by the government. When these emission rights are traded, the market price of these rights represents the emission price. Common to both systems are sanctions on companies that do not comply. Today both systems have been implemented somewhere in the world to control GHG emissions so that their comparable benefits and disadvantages can be studied in reality.