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Reviewing the Market Stability Reserve in light of more ambitious EU ETS emission targets

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  • Osorio, Sebastian
  • Tietjen, Oliver
  • Pahle, Michael
  • Pietzcker, Robert
  • Edenhofer, Ottmar

Abstract

The stringency of the EU’s Emission Trading System (ETS) is bound to be ratcheted-up to deliver on more ambitious goals as put forth in the EU’s Green Deal. Tightening the cap needs to consider the interactions with the Market Stability Reserve (MSR), which will be reviewed in 2021. Against that background, we employ the detailed model LIMES-EU to analyse options for the upcoming reforms. First, we examine how revising MSR parameters impacts allowance cancellations through the MSR. We find that under current regulation, the MSR cancels 5.1 Gt of allowances. Varying MSR parameters leads to cancellations in the range of 2.6 and 7.9 Gt, with the intake/outtake thresholds having the highest impact. Intake rates above 12% only have a limited effect but cause oscillatory intake behaviour. Second, we analyse how the 2030 targets can be achieved by adjusting the linear reduction factor (LRF). We find that the LRF increases MSR cancellations substantially (up to 10.0 Gt). This implies that increasing the LRF from currently 2.2% to 2.6% could already be consistent with the 55% EU-wide emission reduction target in 2030. However, we highlight that the number of MSR cancellations is subject to large uncertainty. Overall, the MSR increases the complexity of the market. In face of that, we suggest to develop the MSR into a Price Stability Reserve.

Suggested Citation

  • 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.
  • Handle: RePEc:zbw:esprep:217240
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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics.
    3. Ruhnau, Oliver & Bucksteeg, Michael & Ritter, David & Schmitz, Richard & Böttger, Diana & Koch, Matthias & Pöstges, Arne & Wiedmann, Michael & Hirth, Lion, 2021. "Why electricity market models yield different results: Carbon pricing in a model-comparison experiment," EconStor Preprints 234468, ZBW - Leibniz Information Centre for Economics.
    4. Pietzcker, Robert C. & Osorio, Sebastian & Rodrigues, Renato, 2021. "Tightening EU ETS targets in line with the European Green Deal: Impacts on the decarbonization of the EU power sector," Applied Energy, Elsevier, vol. 293(C).

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    More about this item

    Keywords

    EU climate policy; EU ETS reform; linear reduction factor (LRF); Market Stability Reserve (MSR); EU ETS Phase IV;
    All these keywords.

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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