An endogenous emissions cap produces a green paradox

Combining price and quantity controls under partitioned environmental regulation

Reyer Gerlagh, Roweno J R K Heijmans and Knut Einar Rosendahl

Economic Policy, 2021, vol. 36, issue 107, 485-522

Abstract: The European Union’s Emissions Trading System (EU ETS) is complemented by a Market Stability Reserve (MSR). After a major revision of the EU ETS in 2018, the MSR effectively makes the supply of allowances responsive to demand. In this paper, we show that a cap-and-trade scheme with an endogenous cap, such as the EU ETS produces a green paradox. Abatement policies announced early but realized in the future are counter-effective because of the MSR, they increase cumulative emissions. We present the mechanisms in a two-period model, and then provide quantitative evidence of our result for an annual 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, such as the “European Green Deal.” We conclude with suggestions to improve the workings of an endogenous cap, ahead of the MSR review scheduled for 2021.

Keywords: D59; E61; H23; Q50; Q54; Q58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://hdl.handle.net/10.1093/epolic/eiab011 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:36:y:2021:i:107:p:485-522.

Access Statistics for this article

Economic Policy is currently edited by Ghazala Azmat, Roberto Galbiati, Isabelle Mejean and Moritz Schularick

More articles in Economic Policy from CEPR, CESifo, Sciences Po Contact information at EDIRC., CES Contact information at EDIRC., MSH Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().