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Rushing the Impatient: Allowance Reserves and the Time Profile of Low-Carbon Investments

Grischa Perino () and Maximilian Willner
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Maximilian Willner: University of Hamburg

Environmental & Resource Economics, 2019, vol. 74, issue 2, No 14, 845-863

Abstract: Abstract Postponing the issue date of allowances in a cap-and-trade scheme, by e.g. a reserve mechanism, impacts the time profile of low-carbon investments. If the postponement constrains intertemporal arbitrage, short-term investments increase but long-term investments are deterred. This effect aggravates the shortage of long-term investments at least partially attributed to firms’ impatience. The cancellation of allowances agreed for Phase IV of the EU ETS is suitable to counteract the negative effects of cap-neutral postponement on long-term investments—by making the reserve redundant. All effects crucially depend on how firms form expectations about future allowance prices.

Keywords: Market stability reserve; Cap-and-trade; Low-carbon investments; EU ETS reform (search for similar items in EconPapers)
JEL-codes: Q54 Q55 Q58 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10640-019-00350-x

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