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Emissions trading with rolling horizons

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  • Quemin, Simon
  • Trotignon, Raphaël

Abstract

We develop an emission permits trading model where covered firms can (1) utilize rolling planning horizons to deal with uncertainty and (2) exhibit bounded responsiveness to supply-side control policies. We calibrate the model to reproduce annual market outcomes in the EU ETS over 2008–2018 and show that a rolling finite horizon reconciles the banking dynamics with discount rates implied by futures contracts’ yield curves. It also replicates the price dynamics well compared to a standard infinite horizon, including the new price regime induced by the 2018 market reform. We then use our calibrated model to decompose the impacts of the 2018 reform’s design elements, quantify how they hinge on the firms’ horizon and responsiveness, and highlight important implications for policy design. For instance, when firms utilize rolling horizons, the Market Stability Reserve can improve effectiveness by frontloading abatement efforts and induce lower cumulative emissions compared to an infinite horizon.

Suggested Citation

  • Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
  • Handle: RePEc:eee:dyncon:v:125:y:2021:i:c:s0165188921000348
    DOI: 10.1016/j.jedc.2021.104099
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    Cited by:

    1. Doda, Baran & Quemin, Simon & Taschini, Luca, 2019. "Linking permit markets multilaterally," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    2. Anouk Faure & Marc Baudry, 2021. "Technological Progress and Carbon Price Formation: an Analysis of EU-ETS Plants," EconomiX Working Papers 2021-18, University of Paris Nanterre, EconomiX.
    3. Bocklet, Johanna & Hintermayer, Martin, 2020. "How does the EU ETS reform impact allowance prices? The role of myopia, hedging requirements and the Hotelling rule," EWI Working Papers 2020-1, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    4. Baudry, Marc & Faure, Anouk & Quemin, Simon, 2021. "Emissions trading with transaction costs," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    5. Osorio, Sebastian & Tietjen, Oliver & Pahle, Michael & Pietzcker, Robert & Edenhofer, Ottmar, 2020. "Reviewing the Market Stability Reserve in light of more ambitious EU ETS emission targets," EconStor Preprints 217240, ZBW - Leibniz Information Centre for Economics.
    6. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design matters!," EWI Working Papers 2020-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    7. Hintermayer, Martin, 2020. "A carbon price floor in the reformed EU ETS: Design matters!," Energy Policy, Elsevier, vol. 147(C).
    8. Johanna Bocklet & Martin Hintermayer, 2020. "How Does the EU ETS Reform Impact Allowance Prices? The Role of Myopia, Hedging Requirements and the Hotelling Rule," CESifo Working Paper Series 8579, CESifo.
    9. Schmidt, Lukas, 2020. "Puncturing the Waterbed or the New Green Paradox? The Effectiveness of Overlapping Policies in the EU ETS under Perfect Foresight and Myopia," EWI Working Papers 2020-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    10. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design Matters!," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224576, Verein für Socialpolitik / German Economic Association.
    11. Tietjen, Oliver & Lessmann, Kai & Pahle, Michael, 2021. "Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion," Resource and Energy Economics, Elsevier, vol. 63(C).
    12. Bocklet, Johanna, 2020. "The Reformed EU ETS in Times of Economic Crises: the Case of the COVID-19 Pandemic," EWI Working Papers 2020-10, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    13. Simon Quemin, 2020. "Using Supply-Side Policies to Raise Ambition: The Case of the EU ETS and the 2021 Review," Working Papers 2002, Chaire Economie du climat.

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    8. Lintunen, Jussi & Kuusela, Olli-Pekka, 2018. "Business cycles and emission trading with banking," European Economic Review, Elsevier, vol. 101(C), pages 397-417.
    9. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design matters!," EWI Working Papers 2020-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
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    More about this item

    Keywords

    Emissions trading; Rolling horizon; Bounded rationality; Supply-side policies; EU ETS;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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