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The Reformed EU ETS - Intertemporal Emission Trading with Restricted Banking

Author

Listed:
  • Bocklet, Johanna

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

  • Hintermayer, Martin

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

  • Schmidt, Lukas

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

  • Wildgrube, Theresa

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

Abstract

With the increase of the linear reduction factor (LRF), the implementation of the market stability reserve (MSR) and the introduction of the cancellation mechanism (CM), the EU ETS changed fundamentally. We develop a discrete time model of the intertemporal allowance market that accurately depicts these reforms assuming that prices develop with the Hotelling rule as long as the TNAC is non-empty. A sensitivity analysis ensures the robustness of the model results regarding its input parameters. The accurate modelling of the EU ETS allows for a decomposition of the effects of the individual amendments and the evaluation of the dynamic efficiency. The MSR shifts emissions to the future but is allowance preserving. The CM reduces the overall emission cap, increasing allowance prices in the long run, but does not significantly impact the emission and price path in the short run. The increased LRF leads with 9 billion cancelled allowances to a stronger reduction than the CM and is therefore the main price driver of the reform.

Suggested Citation

  • Bocklet, Johanna & Hintermayer, Martin & Schmidt, Lukas & Wildgrube, Theresa, 2019. "The Reformed EU ETS - Intertemporal Emission Trading with Restricted Banking," EWI Working Papers 2019-4, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2019_004
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    References listed on IDEAS

    as
    1. Carlén, Björn & Dahlqvist, Anna & Mandell, Svante & Marklund, Pelle, 2019. "EU ETS emissions under the cancellation mechanism - Effects of national measures," Energy Policy, Elsevier, vol. 129(C), pages 816-825.
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    5. Richstein, Jörn C. & Chappin, Émile J.L. & de Vries, Laurens J., 2015. "The market (in-)stability reserve for EU carbon emission trading: Why it might fail and how to improve it," Utilities Policy, Elsevier, vol. 35(C), pages 1-18.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Market Stability Reserve; Dynamic Optimization; Cap and Trade; EU ETS; Cancellation Mechanism; Intertemporal Trading;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • 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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