Long-run changes in the costs of renewables and natural gas as well as technological innovation have cut the cost of emissions reductions in the US electricity sector and made carbon pricing more potent than previously thought.
Lower prices for carbon emissions allowances have posed a crisis of confidence in several trading programs. A new mechanism under the EU ETS appears to be good news for the program, helping allowance prices to stabilize.
This paper surveys emissions markets and factors influencing emissions allowance prices. It examines the consequences of the strong tendency for low prices and discusses how market design can anticipate and remedy this tendency.