Using Supply-Side Policies to Raise Ambition: The Case of the EU ETS and the 2021 Review

Simon Quemin

Working Papers from Chaire Economie du climat

Abstract: Unlike standard supply-side policies, the market stability reserve (MSR) can be used as a potent means of raising climate ambition. We calibrate an emissions trading model to the EU ETS and show that allowing firms to use rolling finite planning horizons can replicate past annual price and banking developments well compared to a standard infinite horizon, including the 2018 price rally. When firms have bounded foresight, indirectly raising ambition through the MSR is not equivalent to directly raising ambition through the emissions cap trajectory. Leveraging the MSR to raise ambition can be efficiency improving as it partially compensates for bounded foresight by frontloading abatement efforts so we analyze its interdependence with the cap trajectory to exploit synergies and minimize regulatory costs. Additionally, we quantitatively assess and compare changes in the MSR parameters for the 2021 review. In any case, MSR-induced resilience to demand shocks remains limited and one-sided by design.

Keywords: Emissions trading; Rolling horizon; Raising ambition; Market stability reserve; EU ETS (search for similar items in EconPapers)
JEL-codes: D47 D81 G41 H32 Q58 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (10)

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