Influence of market structures and market regulation on the carbon market

This study aims to identify the relevant factors that influence the effectiveness and efficiency of carbon markets for greenhouse gas (GHG) mitigation. It focuses on the regulations that establish the carbon market and govern the transaction of allowances as well as the structure and regulation of the product markets that covered entities participate in, particularly the electricity market. It seeks to understand which regulations can lead to a distortion of the allowance price signal and where market structures and regulations limit the effectiveness of the emission trading system (ETS). On the one hand, the design of carbon markets affects the volatility, transparency and the predictability of the carbon price signal and, therefore, the incentive to invest in low-carbon technologies, energy efficiency improvement and innovation. On the other hand, product market regulation determines whether the allowance price signal is transmitted to producers and consumers in a way that creates an incentive to reduce emissions, both in the short and medium to long term.