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Endogenous Emission Caps Always Produce a Green Paradox

Author

Listed:
  • Gerlagh, Reyer

    (Department of Economics, Tilburg University)

  • Hejimans, Roweno J. R. K.

    (Department of Economics, Tilburg University)

  • Rosendahl, Knut Einar

    (School of Economics and Business, Norwegian University of Life Sciences)

Abstract

For any emission trading system (ETS) with quantity-based endogenous supply of allowances, there exists an allowances-demand reducing policy that increases aggregate supply and thus cumulative emissions. We establish this green paradox in a general model and apply the insights to the Market Stability Reserve (MSR) in the EU ETS, implemented in 2018. We show that demand-reducing policies announced in early periods but realized in the future, such as decisions to phase out coal power, can be inverted by the new rules: they may increase cumulative emissions. We provide quantitative evidence of our result for a model disciplined on the price rise in the EU ETS that followed the introduction of the MSR. Our results point to the need for better coordination between different policies in the "European Green Deal" proposed by the European Commission late 2019.

Suggested Citation

  • Gerlagh, Reyer & Hejimans, Roweno J. R. K. & Rosendahl, Knut Einar, 2020. "Endogenous Emission Caps Always Produce a Green Paradox," Working Paper Series 4-2020, Norwegian University of Life Sciences, School of Economics and Business.
    • Handle: RePEc:hhs:nlsseb:2020_004
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    References listed on IDEAS

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    Cited by:

    1. Reyer Gerlagh & Roweno J. R. K. Heijmans & Knut Einar Rosendahl, 2020. "COVID-19 Tests the Market Stability Reserve," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(4), pages 855-865, August.
    2. Valeriya Azarova & Mathias Mier, 2020. "MSR under Exogenous Shock: The Case of Covid-19 Pandemic," ifo Working Paper Series 338, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
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    4. Chen, Li & Wemhoff, Aaron P., 2021. "Predicting embodied carbon emissions from purchased electricity for United States counties," Applied Energy, Elsevier, vol. 292(C).

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    More about this item

    Keywords

    Emissions trading; Green paradox; EU ETS; environmental policy; dynamic modeling;
    All these keywords.

    JEL classification:

    • D59 - Microeconomics - - General Equilibrium and Disequilibrium - - - Other
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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