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Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve

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  • Kollenberg, Sascha
  • Taschini, Luca

Abstract

We study the impact of a supply management mechanism (SMM) similar to the Market Stability Reserve proposed in 2015 which preserve the overall emissions cap and we comment on the recent cap-changing amendments. We provide an analytical description of the conditions under which an SMM alters the emissions abatement paths, affecting the expected length of the banking period and its variability. While abatement strategies of risk neutral firms solely depend on the former, for risk-averse firms changes in the latter would lead to higher risk premia, accelerated depletion of the bank and, consequently, further reduction of abatement and allowance prices. Cancellation of part of the reserve could partially outweigh the effect on risk premia sustaining allowance prices.

Suggested Citation

  • Kollenberg, Sascha & Taschini, Luca, 2019. "Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve," European Economic Review, Elsevier, vol. 118(C), pages 213-226.
  • Handle: RePEc:eee:eecrev:v:118:y:2019:i:c:p:213-226
    DOI: 10.1016/j.euroecorev.2019.05.013
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    Cited by:

    1. 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).
    2. Marc Baudry & Anouk Faure & Simon Quemin, 2020. "Emissions Trading with Transaction Costs," Working Papers 2007, Chaire Economie du climat.
    3. 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.
    4. Simon Quemin & Raphael Trotignon, 2019. "Emissions trading with rolling horizons," Working Papers 1901, Chaire Economie du climat.
    5. 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.
    6. Herweg, Fabian, 2020. "Overlapping efforts in the EU Emissions Trading System," Economics Letters, Elsevier, vol. 193(C).
    7. Gerlagh, Reyer & Heijmans, Roweno J.R.K. & Rodendahl, Knut Einar, 2019. "Endogenous Emission Caps Always Induce a Green Paradox," Other publications TiSEM a629a851-9ea0-4022-aa1b-c, Tilburg University, School of Economics and Management.
    8. 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.
    9. 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.

    More about this item

    Keywords

    EU ETS Reform; Policy Responsiveness; Resilience; Supply Management Mechanism; Risk-Aversion;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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