Trading Up: The Case for an International Carbon Market Reserve to Reduce Volatility at the Limits in 2020 and Beyond

December 2013

Climate policymakers face major challenges when designing future global carbon markets. On one hand, domestic carbon markets are currently spreading and linking rapidly around the world; carbon markets, and carbon pricing instruments in general, present the most flexible mechanism to create low-carbon economies. Yet today’s global carbon market is somewhat dysfunctional and highly volatile—characterized by dramatic changes in supply, demand, price, and public confidence. In this paper we make the case for one useful, albeit partial, solution: a new international carbon market reserve with the authority and mandate to adjust the supply of global carbon market securities when prices rise or fall to extremes. An international carbon market reserve could help nations temper likely swings in global carbon markets by increasing the supply of carbon credits when demand exceeds supply, and potentially reduce supply by purchasing credits when prices fall.