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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)

Abstract: 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
Date: 2020-11-13
New Economics Papers: this item is included in nep-ene and nep-env
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