Postponing Auctioning Versus Cancellation of Allowances in the EU ETS

40 Pages Posted: 3 Feb 2021

See all articles by Eva-Maria Mauer

Eva-Maria Mauer

Potsdam-Institut für Klimafolgenforschung (PIK)

Samuel J Okullo

Potsdam-Institut für Klimafolgenforschung (PIK)

Michael Pahle

Potsdam Institute for Climate Impact Research (PIK)

Date Written: October 27, 2020

Abstract

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

Mauer, Eva-Maria and Okullo, Samuel J and Pahle, Michael, Postponing Auctioning Versus Cancellation of Allowances in the EU ETS (October 27, 2020). Available at SSRN: https://ssrn.com/abstract=3719948 or http://dx.doi.org/10.2139/ssrn.3719948

Eva-Maria Mauer (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Samuel J Okullo

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Michael Pahle

Potsdam Institute for Climate Impact Research (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

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