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Competitive Permit Storage and Market Design: An Application to the EU-ETS

Simon Quemin and Raphael Trotignon

No 2018.19, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: We develop a model of competitive inter-temporal emissions trading under uncertainty that features the core design elements of the EU-ETS to assess the recent market reform, essentially the market stability reserve. Modeling novelties include the introduction of myopia on the part of covered firms, of their ability to understand the interaction between their decisions and the MSR actions over time, as well as the implementation of a recursive procedure to solve for the certainty-equivalent market equilibrium solution. We calibrate the model on 2008-2017 market data to match observed price and banking paths. We find that the MSR always raises the permit price and never preserves the overall cap integrity, irrespective of the permit cancellation provision. Our results also suggest that the purported MSR responsiveness to demand shocks (e.g. recession, renewable deployment) would be limited, especially when firms are unable to anticipate future MSR-driven supply changes.

Keywords: Inter-temporal emissions trading; EU-ETS reform; Supply responsiveness design; Rational expectations equilibrium; Heuristic (search for similar items in EconPapers)
JEL-codes: Q58 Q54 H23 E63 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018-12
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur and nep-reg
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