Modelling a Market Stability Reserve in Carbon Markets

23 Pages Posted: 10 Jun 2015

See all articles by Anne Schopp

Anne Schopp

German Institute for Economic Research (DIW Berlin)

William W. Acworth

Independent; ICAP

Daniel Huppmann

International Institute for Applied Systems Analysis (IIASA)

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Date Written: May 2015

Abstract

We examine under which conditions a cap-and-trade mechanism can deliver a dynamically efficient abatement pathway and contribute to a robust investment framework. For this we develop a numerical dynamic partial-equilibrium model that includes differentiated objective functions of different market participants for holding emission allowances based on their banking strategy. If the surplus of allowances is large, as currently observed in the European Union Emissions Trading System, the equilibrium market outcome can deviate from an efficient abatement pathway and performance of the policy is reduced against a set of key criteria (dynamic efficiency, price credibility, price consistency, and robustness to shocks). The model is applied to assess design options of quantity and price based market stability reserves as discussed in Europe. Both price and quantity based mechanisms can improve the performance of the EU ETS against key criteria.

Keywords: Computational Model, Emissions trading, Environmental Regulation, Market stability reserve

JEL Classification: D84, G18, Q48

Suggested Citation

Schopp, Anne and Acworth, William W. and Huppmann, Daniel and Neuhoff, Karsten, Modelling a Market Stability Reserve in Carbon Markets (May 2015). DIW Berlin Discussion Paper No. 1483, Available at SSRN: https://ssrn.com/abstract=2616333 or http://dx.doi.org/10.2139/ssrn.2616333

Anne Schopp

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

William W. Acworth

Independent ( email )

ICAP ( email )

2 Broadgate
London, EC2M 7UR
United Kingdom

Daniel Huppmann

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, A-2361
Austria

Karsten Neuhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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