Puncturing the Waterbed or the New Green Paradox? The Effectiveness of Overlapping Policies in the EU ETS under Perfect Foresight and Myopia
Lukas Schmidt ()
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Lukas Schmidt: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
No 2020-7, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
The latest reform of European Union Emission Trading System (EU ETS) enables overlapping policies, such as national coal phase-outs, to aﬀect total emissions. For evaluating overlapping policies, this paper applies a detailed partial equilibrium model of the EU ETS. Under perfect foresight, overlapping policies decrease total emissions if implemented early on. Though, endogenous cancellation within the EU ETS mitigates the waterbed eﬀect hardly by more than 50%. In contrast, overlapping policies mostly do not aﬀect total emissions signiﬁcantly or even increase them via the new green paradox eﬀect if implemented late and ﬁrms anticipate their long-term impact. If overlapping policies focus on low-cost abatement options, they become more eﬀective in mitigating the waterbed eﬀect, with an eﬀectiveness of up to 60%. The eﬀectiveness of overlapping policies decreases if ﬁrms are myopic. Myopia also increases the danger of the new green paradox eﬀect for early implemented overlapping policies. However, the absolute increase in total emissions via the new green paradox remains below a third of today's yearly emissions if overlapping policies permanently reduce allowance demand by 10%.
Keywords: Intertemporal Emission Trading; Overlapping Policies; EU ETS; New Green Paradox; Marginal Abatement Costs; Myopia (search for similar items in EconPapers)
JEL-codes: C61 H23 Q48 Q58 (search for similar items in EconPapers)
Pages: 27 pages
New Economics Papers: this item is included in nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2020_007
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