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The reformed EU ETS - Intertemporal emission trading with restricted banking

Author

Listed:
  • Bocklet, Johanna
  • Hintermayer, Martin
  • Schmidt, Lukas
  • Wildgrube, Theresa

Abstract

With the increase of the linear reduction factor, the implementation of the market stability reserve and the introduction of the cancellation mechanism, the EU ETS changed fundamentally. We develop a discrete time model of the intertemporal allowance market that accurately depicts these reforms assuming that prices develop with the Hotelling rule as long as the aggregated bank is non-empty. A sensitivity analysis ensures the robustness of the model results regarding its input parameters. The accurate modelling of the EU ETS allows for a decomposition of the effects of the individual amendments and the evaluation of their cost effectiveness. The market stability reserve shifts emissions to the future but is allowance preserving. A one-time cancellation reduces the overall emission cap, increasing allowance prices in the long run, but does not significantly impact the emission and price path in the short run. The increased linear reduction factor leads with 9 billion cancelled allowances to a stronger reduction than the cancellation mechanism and is therefore the main price driver of the reform.

Suggested Citation

  • Bocklet, Johanna & Hintermayer, Martin & Schmidt, Lukas & Wildgrube, Theresa, 2019. "The reformed EU ETS - Intertemporal emission trading with restricted banking," Energy Economics, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:eneeco:v:84:y:2019:i:c:s0140988319302671
    DOI: 10.1016/j.eneco.2019.104486
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Market stability reserve; Dynamic optimization; EU ETS; Cancellation mechanism; Intertemporal trading;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • 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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