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Competitive Permit Storage and Market Design: An Application to the EU-ETS

Author

Listed:
  • Simon Quemin

    (Paris-Dauphine University & Climate Economics Chair)

  • Raphael Trotignon

    (Climate Economics Chair)

Abstract

We develop a model of competitive inter-temporal emissions trading under uncertainty that features the core design elements of the EU-ETS to assess the recent market reform, essentially the market stability reserve. Modeling novelties include the introduction of myopia on the part of covered firms, of their ability to understand the interaction between their decisions and the MSR actions over time, as well as the implementation of a recursive procedure to solve for the certainty-equivalent market equilibrium solution. We calibrate the model on 2008-2017 market data to match observed price and banking paths. We find that the MSR always raises the permit price and never preserves the overall cap integrity, irrespective of the permit cancellation provision. Our results also suggest that the purported MSR responsiveness to demand shocks (e.g. recession, renewable deployment) would be limited, especially when firms are unable to anticipate future MSR-driven supply changes.

Suggested Citation

  • Simon Quemin & Raphael Trotignon, 2018. "Competitive Permit Storage and Market Design: An Application to the EU-ETS," Working Papers 2018.19, FAERE - French Association of Environmental and Resource Economists.
  • Handle: RePEc:fae:wpaper:2018.19
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    References listed on IDEAS

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    More about this item

    Keywords

    Inter-temporal emissions trading; EU-ETS reform; Supply responsiveness design; Rational expectations equilibrium; Heuristic;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • 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

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