The Carbon Price Paradox

Should the carbon price be high to stimulate climate-friendly technologies or should
it be low to realize inexpensive emission reductions? This ‘carbon price paradox’ is
unraveled for the EU on the basis of legal, economic and political arguments.
Legally, the primary aim of the EU ETS Directive is to promote cost-effective emission
reductions. Economically, the rate of emission reduction in the EU ETS and to
an increasing extent also its indirect impact on technological innovation are not so
much determined by the level of the allowance price, but rather by the rate at which
the emission ceiling falls. Politically, a lower carbon price creates room to lower the
emission ceiling more quickly. In sum, society should welcome a low carbon price.