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CRUE-CSIC (Acuerdos Transformativos 2022), The release of carbon dioxide into the atmosphere is the main driver of global warming and a threat that is becoming particularly important to the financial markets. The long-term, structural and systemic impact of global warming could damage the real economy and financial stability through different channels. This paper explores the co-movement between carbon price changes, as a short term indicator of global warming, and U.S. stock returns along the full conditional distribution of industry portfolios through a Carbon Dioxide Risk exposure measure, Co2Risk, inspired by the financial systemic risk literature. We find evidence of a sign-switching sensitivity at different quantiles, which implies that the uncertainty surrounding carbon risk seems to have an asymmetric impact on the industry conditional distributions. We find that drastic increases in carbon prices (positive changes in emissions) reduce the risk exposure during bear markets, but increase it during bullish scenarios. We also find that large polluter sectors show greater sensitivity to changes in carbon emissions., Fac. de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico (ICAE), TRUE, pub

The low prices in the European Emission Trading System (EU ETS) have triggered discussions of various possible reforms. One option is to decouple the CO 2 prices from renewable energy policy by adjusting the emission cap to renewable energy investment overshoots. We introduce two ways of reducing the CO 2 cap in response to overshoots of renewable policy investment over previously announced targets. We investigate these options with the agent-based model EMLab-generation. We find that both policy implementations are successful in restoring prices. They also ensure that making public investments that exceed policy targets contribute to carbon emission reduction, and that renewable policy does not benefit the most emission-intensive power plants. However, neither policy is suitable for achieving specifc levels of prices or price volatility., Engineering Systems and Services, Technology, Policy and Management

The recent low CO2 prices in the European Union Emission Trading Scheme (EU ETS) have triggered a discussion whether the EU ETS needs to be adjusted. We study the effects of CO2 price floors and a price ceiling on the dynamic investment pathway of two interlinked electricity markets (loosely based on Great Britain, which already has introduced a price floor, and on Central Western Europe). Using an agent-based electricity market simulation with endogenous investment and a CO2 market (including banking), we analyse the cross-border effects of national policies as well as system-wide policy options. A common, moderate CO2 auction reserve price results in a more continuous decarbonisation pathway. This reduces CO2 price volatility and the occurrence of carbon shortage price periods, as well as the average cost to consumers. A price ceiling can shield consumers from extreme price shocks. These price restrictions do not cause a large risk of an overall emissions overshoot in the long run. A national price floor lowers the cost to consumers in the other zone; the larger the zone with the price floor, the stronger the effect. Price floors that are too high lead to inefficiencies in investment choices and to higher consumer costs., Engineering, Systems and Services, Technology, Policy and Management