Endogenous Emission Caps Always Produce a Green Paradox

Reyer Gerlagh (r.gerlagh@uvt.nl), Roweno J. R. K. Hejimans (r.j.r.k.heijmans@uvt.nl) and Knut Einar Rosendahl
Additional contact information
Reyer Gerlagh: Department of Economics, Tilburg University, Postal: Tilburg University, Department of Economics, P.O.box 90153, 5037 AB Tilburg, The Netherlands, Norway
Roweno J. R. K. Hejimans: Department of Economics, Tilburg University, Postal: Tilburg University, Department of Economics, P.O.box 90153, 5037 AB Tilburg, The Netherlands, Norway

No 4-2020, Working Paper Series from Norwegian University of Life Sciences, School of Economics and Business

Abstract: For any emission trading system (ETS) with quantity-based endogenous supply of allowances, there exists an allowances-demand reducing policy that increases aggregate supply and thus cumulative emissions. We establish this green paradox in a general model and apply the insights to the Market Stability Reserve (MSR) in the EU ETS, implemented in 2018. We show that demand-reducing policies announced in early periods but realized in the future, such as decisions to phase out coal power, can be inverted by the new rules: they may increase cumulative emissions. We provide quantitative evidence of our result for a model disciplined on the price rise in the EU ETS that followed the introduction of the MSR. Our results point to the need for better coordination between different policies in the "European Green Deal" proposed by the European Commission late 2019.

Keywords: Emissions trading; Green paradox; EU ETS; environmental policy; dynamic modeling (search for similar items in EconPapers)
JEL-codes: D59 E61 H23 Q50 Q54 Q58 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020-05-08
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur, nep-mac and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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