Why the EU Market Stability Reserve deters long-term low-carbon investments

Grischa Perino and Maximilian Willner

No 44, WiSo-HH Working Paper Series from University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory

Abstract: Postponing the issue date of allowances in a cap-and-trade scheme as instituted e.g. in the Market Stability Reserve (MSR) of the EU ETS has an impact on abatement technology adoption. Stimulating low-carbon investments is a key objective of the MSR. We show that postponing allowances has an ambiguous effect on investments. By constraining intertemporal arbitrage, it shifts investments towards short-term reductions. Long-term investments are deterred. Reform proposals for Phase IV of the EU ETS are suitable to counteract the negative effects of the MSR on long-term investments but undermine the very idea of the MSR. The effects crucially depend on how firms form expectations about future allowance prices.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:uhhwps:44

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