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The Market Stability Reserve in the EU Emissions Trading System: A Critical Review

Author

Listed:
  • Simone Borghesi

    (Department of Political and International Sciences, University of Siena, Siena, Italy)

  • Michael Pahle

    (Potsdam Institute for Climate Impact Research (PIK), Potsdam, Germany)

  • Grischa Perino

    (Department of Socioeconomics, Universität Hamburg, Hamburg, Germany)

  • Simon Quemin

    (Potsdam Institute for Climate Impact Research (PIK), Potsdam, Germany)

  • Maximilian Willner

    (Department of Socioeconomics, Universität Hamburg, Hamburg, Germany)

Abstract

Having experienced low prices for about a decade, the European Union Emissions Trading System has been supplemented with the market stability reserve (MSR) that adjusts the supply of allowances to market outcomes. We critically review the literature assessing the performance of the MSR against several policy objectives. In doing so, we cover both conceptual aspects and quantitative assessments. We conclude by pointing out important policy implications and open issues for further research.

Suggested Citation

  • Simone Borghesi & Michael Pahle & Grischa Perino & Simon Quemin & Maximilian Willner, 2023. "The Market Stability Reserve in the EU Emissions Trading System: A Critical Review," Annual Review of Resource Economics, Annual Reviews, vol. 15(1), pages 131-152, October.
    • Handle: RePEc:anr:reseco:v:15:y:2023:p:131-152
    DOI: 10.1146/annurev-resource-111820-030145
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    References listed on IDEAS

    as
    1. de Perthuis, Christian & Trotignon, Raphael, 2014. "Governance of CO2 markets: Lessons from the EU ETS," Energy Policy, Elsevier, vol. 75(C), pages 100-106.
    2. Matthew Ranson & Robert N. Stavins, 2016. "Linkage of greenhouse gas emissions trading systems: learning from experience," Climate Policy, Taylor & Francis Journals, vol. 16(3), pages 284-300, April.
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    4. Azarova, Valeriya & Mier, Mathias, 2021. "Market Stability Reserve under exogenous shock: The case of COVID-19 pandemic," Applied Energy, Elsevier, vol. 283(C).
    5. Kollenberg, Sascha & Taschini, Luca, 2019. "Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve," European Economic Review, Elsevier, vol. 118(C), pages 213-226.
    6. Maximilian Willner & Grischa Perino, 2022. "Beyond Control: Policy Incoherence of the EU Emissions Trading System," Politics and Governance, Cogitatio Press, vol. 10(1), pages 256-264.
    7. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, June.
    8. Burtraw, Dallas & Palmer, Karen & Munnings, Clayton & Weber, Paige & Woerman, Matt, 2013. "Linking by Degrees: Incremental Alignment of Cap-and-Trade Markets," RFF Working Paper Series dp-13-04, Resources for the Future.
    9. 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 225210, ZBW - Leibniz Information Centre for Economics.
    10. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    11. Fell, Harrison, 2016. "Comparing policies to confront permit over-allocation," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 53-68.
    12. Marina Friedrich & Sébastien Fries & Michael Pahle & Ottmar Edenhofer, 2020. "Rules vs. Discretion in Cap-and-Trade Programs: Evidence from the EU Emission Trading System," CESifo Working Paper Series 8637, CESifo.
    13. 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.
    14. Trevor L. Davis & Mark C. Thurber & Frank A. Wolak, 2020. "An Experimental Comparison of Carbon Pricing Under Uncertainty in Electricity Markets," NBER Working Papers 27260, National Bureau of Economic Research, Inc.
    15. Reyer Gerlagh & Roweno J. R. K. Heijmans, 2019. "Climate-conscious consumers and the buy, bank, burn program," Nature Climate Change, Nature, vol. 9(6), pages 431-433, June.
    16. Reyer Gerlagh & Roweno J R K Heijmans & Knut Einar Rosendahl, 2021. "An endogenous emissions cap produces a green paradox [Combining price and quantity controls under partitioned environmental regulation]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(107), pages 485-522.
    17. Simon Quemin & Michael Pahle, 2023. "Financials threaten to undermine the functioning of emissions markets," Nature Climate Change, Nature, vol. 13(1), pages 22-31, January.
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    Citations

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    Cited by:

    1. Cristiano Salvagnin, 2024. "Review of the EU ETS Literature: A Bibliometric Perspective," Papers 2409.01739, arXiv.org, revised Nov 2024.

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    More about this item

    Keywords

    climate policy; emissions trading; EU ETS; stability mechanism; overlapping policies;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • 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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