Endogenizing the Cap in a Cap-and-Trade System: Assessing the Agreement on EU ETS Phase 4

Ulrik Beck and Peter K. Kruse-Andersen ()
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Ulrik Beck: Danish Research institute for Economic Analysis and Modelling
Peter K. Kruse-Andersen: University of Copenhagen

Environmental & Resource Economics, 2020, vol. 77, issue 4, No 5, 811 pages

Abstract: Abstract In early 2018, a reform of the world’s largest functioning greenhouse gas emissions cap-and-trade system, the EU Emissions Trading System (ETS), was formally approved. The reform changed the main principles of the system by endogenizing the emissions cap. We show that the emissions cap is now affected by the allowance demand and is therefore no longer set directly by EU policymakers. As a consequence, national policies that reduce allowance demand can now reduce long-run cumulative emissions, which is not possible in a standard cap-and-trade system. Using a newly developed dynamic model of the EU ETS, we show that policies that reduce allowance demand can have substantial effects on cumulative emissions after the reform. Model simulations also suggest that the reform reduces long-run cumulative emissions and, to a lesser extent, reduces emissions in the short run. Even so, the reform has a small short-run impact on the currently large allowance surplus.

Keywords: Cap-and-trade; EU ETS; Market Stability Reserve; Overlapping policies; Q48; Q54; Q58 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s10640-020-00518-w

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