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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

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 riskaverse 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: ES/K006576/1 (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2019-09-01
New Economics Papers: this item is included in nep-env
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Published in European Economic Review, 1, September, 2019, 118, pp. 213-226. ISSN: 0014-2921

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Journal Article: Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve (2019) Downloads
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