B-CCaS Director to speak at third international workshop on climate finance, risk and uncertainty modelling

For three days in April, leading academics, practitioners, and regulators will gather together in Paris to discuss the most pressing challenges in climate finance, at an event hosted by Ecole polytechnique and the Banque de France.

Luca's presentation will focus on cap-and-trade systems, the main market-based mechanism for regulating greenhouse gas emissions, and addresses one of the most critical challenges in regulating greenhouse gas emissions: ensuring that carbon pricing reflects underlying market fundamentals.

Cap-and-trade systems, exemplified by the EU Emissions Trading Scheme, have long been touted as a cornerstone of market-based climate policy. However, the recent data points to a sobering problem: carbon permit prices are up to eighty times more volatile than one would expect if they were simply tracking the social cost of carbon. Such volatility imposes real economic costs, including measurable welfare losses, and undermines the confidence of investors and firms that must plan expensive, long-term emissions-reduction projects.

Luca and his co-authors propose a Carbon Cap Rule which directly tackles this issue by dynamically adjusting emissions caps in response to key (fundamental-based) shocks. This approach, which significantly reduces market volatility, can serve as a blueprint for a future Central Carbon Bank—an institution designed to manage carbon markets in a manner reminiscent of how central banks guide monetary policy through interest rate rules. By offering policymakers a clear, formulaic mechanism for aligning supply with underlying market fundamentals, the Carbon Cap Rule ensures that the price signal remains meaningful. With climate change accelerating, and regulatory scrutiny intensifying across financial institutions, this research is timely and relevant for a wide range of stakeholders, from banks and regulators to industries seeking reliable, long-term price signals.