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On the time-dependency of MAC curves and its implications for the EU ETS

Author

Listed:
  • Hintermayer, Martin

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

  • Schmidt, Lukas

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

  • Zinke, Jonas

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

Abstract

Recently, several articles rely on marginal abatement cost (MAC) curves to analyze the EU ETS. While the assumptions on MAC curves drive the results, the prevailing literature on the EU ETS does not take the shape of MAC curves into account. This paper discusses the implications of MAC curve properties for the EU ETS. With a partial equilibrium model of the European power sector, we derive two essential properties of MAC curves: First, the shape of MAC curves is convex and depends on economic developments, e.g., fuel prices and interest rates. Second, MAC curves flatten over time, mainly due to enlarging investment opportunities. With convex MAC curves, marginal abatement costs in the EU ETS increase over time, which triggers higher banking of firms. On the contrary, flattening MAC curves over time lead to lower incentives for banking. In particular, short-term MAC curves are steep and thus, raise the price path.

Suggested Citation

  • Hintermayer, Martin & Schmidt, Lukas & Zinke, Jonas, 2020. "On the time-dependency of MAC curves and its implications for the EU ETS," EWI Working Papers 2020-8, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2020_008
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    File URL: https://www.ewi.uni-koeln.de/cms/wp-content/uploads/2020/09/E-CUBE-EWI-2030-Peak-Power-Demand-in-North-West-Europe-vf3.pdf
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    Citations

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    Cited by:

    1. Wildgrube, Theresa, 2022. "Fit for 55? An assessment of the effectiveness of the EU COM's reform proposal for the EU ETS," EWI Working Papers 2022-4, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    2. Bazzana, Davide & Rizzati, Massimiliano & Ciola, Emanuele & Turco, Enrico & Vergalli, Sergio, 2023. "Warming the MATRIX: a Climate Assessment under Uncertainty and Heterogeneity," FEEM Working Papers 334607, Fondazione Eni Enrico Mattei (FEEM).

    More about this item

    Keywords

    EU ETS; Marginal Abatement Cost Curves; Emission Abatement; Power Sector Modeling;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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