Potential Impacts of the Planned Market Stability Reserve on Speculators’ Behavior in the EU Emissions Trading System

Florian Falcke () and Reinhard Madlener
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Florian Falcke: RWTH Aachen University, Postal: Templergraben 55, 52056 Aachen, Germany, http://www.rwth-aachen.de/

No 9/2016, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: In early 2019, the market stability reserve (MSR), a volume-based regulatory regime for tackling the surplus in emission allowances (EUAs) in the EU Emissions Trading System (EU ETS), will enter into force. The MSR will take EUAs out of the market when the amount of banked and thus unused EUAs exceeds an upper threshold and will release EUAs into the market when the amount of banked EUAs falls under a lower threshold. Over the last years, the design of the MSR has been the topic of controversial discussion. Among other concerns, scientists are afraid that the MSR may increase price volatility and uncertainty, which in turn may enhance specula-tive activity. In this paper we analyze the effect of the MSR on the behavior of a speculator with market power. For this purpose, the interlinked electricity and carbon market is modeled with an open-source agent-based model, which is expanded by adding the banking behavior of the spec-ulator. The results indicate that with the MSR mechanism being active in the EU ETS, both speculative banking activity and speculator profit increase. We further test the hypothesis that the MSR mechanism itself could be used by a speculator to increase his returns, leading to the conclusion that while this is theoretically possible, it is unlikely to actually happen. The results obtained can help to understand future behavior of market participants in the EU ETS.

Keywords: Global warming; Climate change mitigation; EU ETS; Speculation (search for similar items in EconPapers)
JEL-codes: D84 G18 Q48 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2016-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:fcnwpa:2016_009

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