Endogenous Emission Caps Always Induce a Green Paradox

39 Pages Posted: 14 Oct 2019

See all articles by Reyer Gerlagh

Reyer Gerlagh

Tilburg University - Tilburg University School of Economics and Management

Roweno Heijmans

Tilburg University

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Date Written: 2019

Abstract

For any emission trading system (ETS) with quantity-based endogenous supply of allowances, there exists a negative demand shock, e.g. induced by abatement policy, that increases aggregate supply and thus cumulative emissions. We prove this green paradox for a general model and then apply it to the details of EU ETS. In 2018, new rules for a Market Stability Reserve (MSR) were agreed on and implemented. We show that abatement policies announced in early periods but realized in the future, are inverted by the new rules and increase cumulative emissions. We provide quantitative evidence of our result for a model disciplined on the price rise in the EU ETS that followed the introduction of the MSR.

Keywords: emissions trading, green paradox, EU ETS, environmental policy, dynamic modeling

JEL Classification: D590, E610, H230, Q500, Q540, Q580

Suggested Citation

Gerlagh, Reyer and Heijmans, Roweno and Rosendahl, Knut Einar, Endogenous Emission Caps Always Induce a Green Paradox (2019). CESifo Working Paper No. 7862. Available at SSRN: https://ssrn.com/abstract=3467997

Reyer Gerlagh (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Roweno Heijmans

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Knut Einar Rosendahl

Norwegian University of Life Sciences ( email )

PO Box 5033
NO-1432 Aas
Norway
+47 64966117 (Phone)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+47 21094954 (Phone)
+47 21094963 (Fax)

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