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An Analysis of Allowance Banking in the EU ETS

Author

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  • Zaklan, Aleksandar
  • Ellerman, Denny
  • Valero, Vanessa

Abstract

The existence of some 2 billion unused EU Allowances (EUAs) at the end of Phase II of the EU s Emissions Trading System (EU ETS) has sparked considerable debate about structural shortcomings of the EU ETS. However, there has been a surprising lack of interest in considering the accumulation of EUAs in light of the theory of intertemporal permit trading, i.e. allowance banking. In this paper we adapt basic banking theory to the case of a linearly declining cap, as is common in greenhouse gas control systems. We show that it is perfectly rational for agents to decrease emissions beyond the constraint imposed by the cap initially, accumulating an allowance bank and then drawing it down in the interest of minimizing abatement cost over time. Having laid out the theory, we carry out a set of simulations for a reasonable range of key parameters, geared to the EU ETS, to illustrate the effects of intertemporal optimization of abatement decisions on optimal time paths of emissions and allowance prices. We conclude that bank accumulation as the result of intertemporal abatement cost optimization should be considered at least a partial explanation when evaluating the current discrepancy between the cap and observed emissions.

Suggested Citation

  • Zaklan, Aleksandar & Ellerman, Denny & Valero, Vanessa, 2015. "An Analysis of Allowance Banking in the EU ETS," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113034, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:113034
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    References listed on IDEAS

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    1. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
    2. Kling, Catherine L. & Rubin, Jonathan, 1993. "Emission Saved is an Emission Earned: An Empirical Study of Emission Banking (An)," Staff General Research Papers Archive 1579, Iowa State University, Department of Economics.
    3. Rubin Jonathan & Kling Catherine, 1993. "An Emission Saved Is an Emission Earned: An Empirical Study of Emission Banking for Light-Duty Vehicle Manufacturers," Journal of Environmental Economics and Management, Elsevier, vol. 25(3), pages 257-274, November.
    4. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
    5. Yates, Andrew J. & Cronshaw, Mark B., 2001. "Pollution Permit Markets with Intertemporal Trading and Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 104-118, July.
    6. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-189, March.
    7. Stevens, Brandt & Rose, Adam, 2002. "A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 45-69, July.
    8. Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
    9. repec:dau:papers:123456789/10174 is not listed on IDEAS
    10. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
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    Cited by:

    1. Abrell, Jan & Rausch, Sebastian, 2017. "Combining price and quantity controls under partitioned environmental regulation," Journal of Public Economics, Elsevier, vol. 145(C), pages 226-242.
    2. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
    3. Perino, Grischa & Willner, Maximilian, 2016. "Procrastinating reform: The impact of the market stability reserve on the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 37-52.
    4. Delarue, Erik & Van den Bergh, Kenneth, 2016. "Carbon mitigation in the electric power sector under cap-and-trade and renewables policies," Energy Policy, Elsevier, vol. 92(C), pages 34-44.
    5. repec:gam:jeners:v:11:y:2018:i:4:p:706-:d:137313 is not listed on IDEAS

    More about this item

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • F18 - International Economics - - Trade - - - Trade and Environment

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