BAKU, Azerbaijan, Aug.1. Any new investments in fossil fuel extraction should be evaluated carefully to avoid stranded assets or an increase in reliance on polluting energy sources, Trend reports with reference to the International Monetary Fund (IMF).
“Some investments can pay off relatively quickly and have temporary effects (e.g., delaying coal mine closures). However, investments in fossil fuels or electricity production based on such fuels with a longer time horizon should be avoided,” reads the latest IMF report.
The report reveals that an explicit price floor for future ETS permit prices would help maintain robust incentives for energyefficient and low-carbon investments.
“The high volatility of fossil fuel prices may increase uncertainty over the future levels of ETS permit prices. Since higher fossil fuel prices tend to lower energy consumption, raise energy efficiency, and encourage a shift to renewables, the expected carbon price necessary to reach emissions goals may fall when fossil fuel prices increase. However, carbon prices tend to induce a stronger response than increases in fossil fuel prices, which may be seen as temporary.”
IMF analysts believe that to provide certainty for renewable and other low-carbon investments, it could be desirable to introduce an exogenous and progressively increasing price floor in the ETS system.
“The price floor could be implemented though minimum prices for allowance auctions and, if needed, by automatically withdrawing permits through the Market Stability Reserve (MSR) when prevailing market prices fall to the price floor. The risk of price spikes is also a concern—indeed, some of the two billion tons of CO2 allowances accumulated in the MSR are being sold in 2022 (to raise revenue for the REPowerEU plan). These sales, in practice, limit the rise in carbon prices. Specifying an exogenous price ceiling to rule out extreme price spikes (with the ceiling set high and rising over time) would be a more efficient way of preserving a robust price signal than discretionary sales via the MSR.”
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