Banking of Surplus Emissions Allowances: Does the Volume Matter?
AbstractIn the European Emission Trading scheme the supply of allowances exceeds emissions - cumulating, according to our estimates, in a surplus of 2.7 billion tonnes by 2013/2014. We find that initially the surplus was acquired by power companies so as to hedge future carbon costs. As the surplus exceeds this hedging demand, additional allowances need to be acquired as speculative investment. This requires higher rates of return and implies that expected future carbon prices are highly discounted. This could explain the recent drop in carbon prices. The analysis shows that the volume of unused allowances matters for the discount applied to future carbon prices. We use our supply-demand framework to assess currently discussed policy options set-aside, reserve price for auctions and adjustments of emission targets.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1196.
Length: 21 p.
Date of creation: 2012
Date of revision:
European emission trading scheme; banking; discount rates;
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-CFN-2012-03-21 (Corporate Finance)
- NEP-ENE-2012-03-21 (Energy Economics)
- NEP-ENV-2012-03-21 (Environmental Economics)
- NEP-EUR-2012-03-21 (Microeconomic European Issues)
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