Postponing Auctioning Versus Cancellation of Allowances in the EU ETS
40 Pages Posted: 3 Feb 2021
Date Written: October 27, 2020
Policy makers reformed the European Union (EU) Emission Trading System (ETS) to address low prices and price volatility. They reduced the cap and strengthened the Market Stability Reserve (MSR). The effectiveness of these reforms hinges on path dependency of emission and abatement technology. Conversely to pre-existing analysis, we observe that postponing allowance allocations through the MSR can be equally, if not more signiﬁcant than cancellation. Additional stochastic analysis establishes that the MSR increases price volatility. These ﬁndings imply that the reforms gave reducing allowances too much attention, and managing their availability in response to shocks too little.
Keywords: Emissions Trading System, low-carbon investments, Market Stability Reserve
JEL Classification: C61, Q41, Q55, Q58
Suggested Citation: Suggested Citation