Dynamic Supply Adjustment and Banking Under Uncertainty: The Market Stability Reserve

24 Pages Posted: 6 Mar 2016

See all articles by Sascha Kollenberg

Sascha Kollenberg

University of Duisburg-Essen

Luca Taschini

University of Edinburgh Business School; London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

Date Written: March 2, 2016

Abstract

The supply of allowances in the European Union Emissions Trading System is currently determined by a rigid allocation programme. The Market Stability Reserve (MSR) makes the allocation of allowances flexible and contingent on the aggregate bank, while preserving the overall emissions cap. We investigate under which conditions the MSR can alter the abatement and allowance price paths. We show that, for risk-neutral firms a cap-preserving MSR is largely irrelevant. The MSR will not influence the expected equilibrium allowance price or average price volatility. We then relax the risk neutrality assumption and investigate how the MSR can impact the risk of an unexpected breakdown of inter-temporal optimisation, ultimately affecting the equilibrium at different points in time. In this context, we show that changes to the timing of allowance allocation by the MSR can have a substantial impact on abatement and allowance price paths when firms are risk-averse.

Keywords: EU ETS Reform, Market Stability Reserve, Policy Design, Responsiveness, Resilience, Supply Management Mechanism, Risk-Aversion

Suggested Citation

Kollenberg, Sascha and Taschini, Luca, Dynamic Supply Adjustment and Banking Under Uncertainty: The Market Stability Reserve (March 2, 2016). Available at SSRN: https://ssrn.com/abstract=2742256 or http://dx.doi.org/10.2139/ssrn.2742256

Sascha Kollenberg (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstraße 12
Essen, 45141
Germany

Luca Taschini

University of Edinburgh Business School

29 Buccleuch Pl
Edinburgh, Edinburgh EH8 9JS
United Kingdom

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

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