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MSR under Exogenous Shock: The Case of Covid-19 Pandemic

Valeriya Azarova and Mathias Mier

No 338, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: The EU implemented the Market Stability Reserve (MSR) in response to the 2008 financial crisis to deal with short-term impacts of future shocks, such as the Covid-19 pandemic. We link a model that intertemporally optimizes the handling of banked allowances every five years with one that simulates the annual working of the EU ETS including the MSR with its potential cancelling. Neglecting the pandemic, 2.16 billion allowances are cancelled. Accounting for the pandemic, 0.28 billion additional allowances are cancelled if the European economy fully recovers by 2021, which even overcompensates the 2020 drop in CO2 emissions. Additional cancelling increases when the pandemic lasts longer, meaning that the MSR even outperforms its initial purpose.

Keywords: Covid-19 pandemic; EU ETS; Market Stability Reserve; decarbonization (search for similar items in EconPapers)
JEL-codes: C61 H23 Q41 Q51 Q54 Q58 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ene and nep-env
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