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Banking of Surplus Emissions Allowances: Does the Volume Matter?

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  • Karsten Neuhoff
  • Anne Schopp
  • Rodney Boyd
  • Kateryna Stelmakh
  • Alexander Vasa

Abstract

In 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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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.394484.de/dp1196.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1196.

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Length: 21 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwwpp:dp1196

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Keywords: European emission trading scheme; banking; discount rates;

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  1. Valentina Bosetti & Carlo Carraro & Emanuele Massetti, 2008. "Banking Permits: Economic Efficiency and Distributional Effects," CESifo Working Paper Series 2214, CESifo Group Munich.
  2. Daniel Phaneuf & Till Requate, 2002. "Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(3), pages 369-390, July.
  3. Wang, Changyun, 2000. "Investor sentiment and return predictability in agricultural futures markets," MPRA Paper 36425, University Library of Munich, Germany, revised Sep 2002.
  4. Emilie Alberola & Julien Pierre Chevallier, 2007. "European carbon prices and banking restrictions: evidence from phase I (2005-2007)," EconomiX Working Papers 2007-32, University of Paris West - Nanterre la Défense, EconomiX.
  5. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
  6. R. Trotignon & A. Denny Ellerman, 2008. "Compliance Behavior in THE EU-ETS: Cross Border Trading, Banking and Borrowing," Working Papers 0812, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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