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The Reformed EU ETS - Intertemporal Emission Trading with Restricted Banking

Johanna Bocklet, Martin Hintermayer, Lukas Schmidt () and Theresa Wildgrube
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Johanna Bocklet: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
Martin Hintermayer: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
Lukas Schmidt: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
Theresa Wildgrube: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

No 2019-4, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

Abstract: With the increase of the linear reduction factor (LRF), the implementation of the market stability reserve (MSR) and the introduction of the cancellation mechanism (CM), the EU ETS changed fundamentally. We develop a discrete time model of the intertemporal allowance market that accurately depicts these reforms assuming that prices develop with the Hotelling rule as long as the TNAC is non-empty. A sensitivity analysis ensures the robustness of the model results regarding its input parameters. The accurate modelling of the EU ETS allows for a decomposition of the effects of the individual amendments and the evaluation of the dynamic efficiency. The MSR shifts emissions to the future but is allowance preserving. The CM reduces the overall emission cap, increasing allowance prices in the long run, but does not significantly impact the emission and price path in the short run. The increased LRF leads with 9 billion cancelled allowances to a stronger reduction than the CM and is therefore the main price driver of the reform.

Keywords: Market Stability Reserve; Dynamic Optimization; Cap and Trade; EU ETS; Cancellation Mechanism; Intertemporal Trading (search for similar items in EconPapers)
JEL-codes: C61 D25 H23 H41 L52 P14 Q48 Q54 Q58 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2019-02-25
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur and nep-reg
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2019_004

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