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Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve

Sascha Kollenberg and Luca Taschini

European Economic Review, 2019, vol. 118, issue C, 213-226

Abstract: We study the impact of a supply management mechanism (SMM) similar to the Market Stability Reserve proposed in 2015 which preserve the overall emissions cap and we comment on the recent cap-changing amendments. We provide an analytical description of the conditions under which an SMM alters the emissions abatement paths, affecting the expected length of the banking period and its variability. While abatement strategies of risk neutral firms solely depend on the former, for risk-averse firms changes in the latter would lead to higher risk premia, accelerated depletion of the bank and, consequently, further reduction of abatement and allowance prices. Cancellation of part of the reserve could partially outweigh the effect on risk premia sustaining allowance prices.

Keywords: EU ETS Reform; Policy Responsiveness; Resilience; Supply Management Mechanism; Risk-Aversion (search for similar items in EconPapers)
Date: 2019
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Working Paper: Dynamic supply adjustment and banking under uncertainty in an Emission Trading Scheme: the Market Stability Reserve (2019) Downloads
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DOI: 10.1016/j.euroecorev.2019.05.013

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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