The reformed EU ETS - Intertemporal emission trading with restricted banking

Johanna Bocklet, Martin Hintermayer, Lukas Schmidt and Theresa Wildgrube

Energy Economics, 2019, vol. 84, issue C

Abstract: With the increase of the linear reduction factor, the implementation of the market stability reserve and the introduction of the cancellation mechanism, 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 aggregated bank 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 their cost effectiveness. The market stability reserve shifts emissions to the future but is allowance preserving. A one-time cancellation 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 linear reduction factor leads with 9 billion cancelled allowances to a stronger reduction than the cancellation mechanism and is therefore the main price driver of the reform.

Keywords: Market stability reserve; Dynamic optimization; EU ETS; Cancellation mechanism; Intertemporal trading (search for similar items in EconPapers)
JEL-codes: C61 D25 Q48 Q54 Q58 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:84:y:2019:i:c:s0140988319302671

DOI: 10.1016/j.eneco.2019.104486

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