IDEAS home Printed from https://ideas.repec.org/a/oup/ecpoli/v36y2021i107p485-522..html
   My bibliography  Save this article

An endogenous emissions cap produces a green paradox
[Combining price and quantity controls under partitioned environmental regulation]

Author

Listed:
  • Reyer Gerlagh
  • Roweno J R K Heijmans
  • Knut Einar Rosendahl

Abstract

The European Union’s Emissions Trading System (EU ETS) is complemented by a Market Stability Reserve (MSR). After a major revision of the EU ETS in 2018, the MSR effectively makes the supply of allowances responsive to demand. In this paper, we show that a cap-and-trade scheme with an endogenous cap, such as the EU ETS produces a green paradox. Abatement policies announced early but realized in the future are counter-effective because of the MSR, they increase cumulative emissions. We present the mechanisms in a two-period model, and then provide quantitative evidence of our result for an annual model disciplined on the price rise in the EU ETS that followed the introduction of the MSR. Our results point to the need for better coordination between different policies, such as the “European Green Deal.” We conclude with suggestions to improve the workings of an endogenous cap, ahead of the MSR review scheduled for 2021.

Suggested Citation

  • Reyer Gerlagh & Roweno J R K Heijmans & Knut Einar Rosendahl, 2021. "An endogenous emissions cap produces a green paradox [Combining price and quantity controls under partitioned environmental regulation]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(107), pages 485-522.
    • Handle: RePEc:oup:ecpoli:v:36:y:2021:i:107:p:485-522.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/epolic/eiab011
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Abrell, Jan & Rausch, Sebastian, 2017. "Combining price and quantity controls under partitioned environmental regulation," Journal of Public Economics, Elsevier, vol. 145(C), pages 226-242.
    2. Kollenberg, Sascha & Taschini, Luca, 2019. "Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve," European Economic Review, Elsevier, vol. 118(C), pages 213-226.
    3. Grischa Perino, 2018. "New EU ETS Phase 4 rules temporarily puncture waterbed," Nature Climate Change, Nature, vol. 8(4), pages 262-264, April.
    4. Kenneth Gillingham & Tsvetan Tsvetanov, 2019. "Hurdles and steps: Estimating demand for solar photovoltaics," Quantitative Economics, Econometric Society, vol. 10(1), pages 275-310, January.
    5. Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, vol. 104(8), pages 2482-2508, August.
    6. Hans-Werner Sinn, 2008. "Public policies against global warming: a supply side approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(4), pages 360-394, August.
    7. Reyer Gerlagh & Roweno J.R.K. Heijmans, 2018. "Regulating Stock Externalities," CESifo Working Paper Series 7383, CESifo.
    8. Beat Hintermann & Sonja Peterson & Wilfried Rickels, 2016. "Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 108-128.
    9. Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-181, May.
    10. I. A. Grant Wilson & Iain Staffell, 2018. "Rapid fuel switching from coal to natural gas through effective carbon pricing," Nature Energy, Nature, vol. 3(5), pages 365-372, May.
    11. Nico Bauer & Christophe McGlade & Jérôme Hilaire & Paul Ekins, 2018. "Divestment prevails over the green paradox when anticipating strong future climate policies," Nature Climate Change, Nature, vol. 8(2), pages 130-134, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Borghesi, Simone & Pahle, Michael & Perino, Grischa & Quemin, Simon & Willner, Maximilian, 2023. "The market stability reserve in the EU emissions trading system: a critical review," LSE Research Online Documents on Economics 120548, London School of Economics and Political Science, LSE Library.
    2. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    3. Simone Borghesi & Michael Pahle & Grischa Perino & Simon Quemin & Maximilian Willner, 2023. "The Market Stability Reserve in the EU Emissions Trading System: A Critical Review," Post-Print hal-04551558, HAL.
    4. Heijmans, Roweno J.R.K. & Engström, Max, 2024. "Time Horizons and Emissions Trading," Discussion Papers 2024/2, Norwegian School of Economics, Department of Business and Management Science.
    5. Beck, Ulrik R. & Kruse-Andersen, Peter K. & Stewart, Louis B., 2023. "Carbon leakage in a small open economy: The importance of international climate policies," Energy Economics, Elsevier, vol. 117(C).
    6. Jiping Sheng & Xiaoge Gao & Yongqi Sun, 2024. "Sustainability of the Food Industry: Ecological Efficiency and Influencing Mechanism of Carbon Emissions Trading Policy in China," Sustainability, MDPI, vol. 16(5), pages 1-25, March.
    7. Heijmans, Roweno J.R.K., 2023. "Adjustable emissions caps and the price of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    8. Bello, S. & Onolemhemhen, R., 2024. "Does carbon pricing policy influence carbon emission intensity? New Evidence from Canadian Provinces," Cambridge Working Papers in Economics 2445, Faculty of Economics, University of Cambridge.
    9. Böhringer, Christoph & Fischer, Carolyn, 2023. "Tax, kill or bill: An analysis of unilateral CO2 price floor options in multilateral emissions trading systems," Journal of Environmental Economics and Management, Elsevier, vol. 119(C).
    10. Nagel, Niels Oliver & Böhringer, Christoph & Rosendahl, Knut Einar & Bolkesjø, Torjus Folsland, 2023. "Impacts of green deal policies on the Nordic power market," Utilities Policy, Elsevier, vol. 80(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gerlagh, Reyer & Heijmans, Roweno J.R.K. & Rodendahl, Knut Einar, 2019. "Endogenous Emission Caps Always Induce a Green Paradox," Other publications TiSEM a629a851-9ea0-4022-aa1b-c, Tilburg University, School of Economics and Management.
    2. Gerlagh, Reyer & Hejimans, Roweno J. R. K. & Rosendahl, Knut Einar, 2020. "Endogenous Emission Caps Always Produce a Green Paradox," Working Paper Series 4-2020, Norwegian University of Life Sciences, School of Economics and Business.
    3. Reyer Gerlagh & Roweno J.R.K. Heijmans & Knut Einar Rosendahl, 2019. "Endogenous Emission Caps Always Induce a Green Paradox," CESifo Working Paper Series 7862, CESifo.
    4. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    5. Ohlendorf, Nils & Flachsland, Christian & Nemet, Gregory F. & Steckel, Jan Christoph, 2022. "Carbon price floors and low-carbon investment: A survey of German firms," Energy Policy, Elsevier, vol. 169(C).
    6. Hintermayer, Martin, 2020. "A carbon price floor in the reformed EU ETS: Design matters!," Energy Policy, Elsevier, vol. 147(C).
    7. Alena Miftakhova & Clément Renoir, 2021. "Economic Growth and Equity in Anticipation of Climate Policy," CER-ETH Economics working paper series 21/355, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    8. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design Matters!," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224576, Verein für Socialpolitik / German Economic Association.
    9. Heijmans, Roweno J.R.K., 2023. "Adjustable emissions caps and the price of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    10. Hintermayer, Martin, 2020. "A Carbon Price Floor in the Reformed EU ETS: Design matters!," EWI Working Papers 2020-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    11. Reyer Gerlagh & Roweno J. R. K. Heijmans & Knut Einar Rosendahl, 2020. "COVID-19 Tests the Market Stability Reserve," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(4), pages 855-865, August.
    12. Quemin, Simon, 2022. "Raising climate ambition in emissions trading systems: The case of the EU ETS and the 2021 review," Resource and Energy Economics, Elsevier, vol. 68(C).
    13. Ulrik Beck & Peter K. Kruse-Andersen, 2020. "Endogenizing the Cap in a Cap-and-Trade System: Assessing the Agreement on EU ETS Phase 4," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(4), pages 781-811, December.
    14. Beat Hintermann & Maja Žarković & Corrado Di Maria & Ulrich J. Wagner, 2020. "The Effect of Climate Policy on Productivity and Cost Pass-Through in the German Manufacturing Sector," CRC TR 224 Discussion Paper Series crctr224_2020_249, University of Bonn and University of Mannheim, Germany.
    15. Baudry, Marc & Faure, Anouk & Quemin, Simon, 2021. "Emissions trading with transaction costs," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    16. Baldwin, Elizabeth & Cai, Yongyang & Kuralbayeva, Karlygash, 2020. "To build or not to build? Capital stocks and climate policy∗," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    17. Bocklet, Johanna, 2020. "The Reformed EU ETS in Times of Economic Crises: the Case of the COVID-19 Pandemic," EWI Working Papers 2020-10, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    18. Leroutier, Marion, 2022. "Carbon pricing and power sector decarbonization: Evidence from the UK," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    19. Schmidt, Lukas, 2020. "Puncturing the Waterbed or the New Green Paradox? The Effectiveness of Overlapping Policies in the EU ETS under Perfect Foresight and Myopia," EWI Working Papers 2020-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    20. Rosendahl, Knut Einar, 2019. "EU ETS and the new green paradox," Working Paper Series 2-2019, Norwegian University of Life Sciences, School of Economics and Business.

    More about this item

    Keywords

    D59; E61; H23; Q50; Q54; Q58;
    All these keywords.

    JEL classification:

    • D59 - Microeconomics - - General Equilibrium and Disequilibrium - - - Other
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:ecpoli:v:36:y:2021:i:107:p:485-522.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/cebruuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.