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The unintended consequences of the EU ETS cancellation policy

Author

Listed:
  • Bruninx, Kenneth
  • Ovaere, Marten
  • Gillingham, Kenneth
  • Delarue, Erik

Abstract

With the Phase 4 cancellation provision, the cumulative emissions cap of the EU ETS has become dependent on the amount of surplus allowances and future emissions abatement costs. In this paper, we discuss how the design of the market stability reserve greatly increases uncertainty over cumulative emissions and implies that there will be more cancellation when future abatement is more costly, making the policy more stringent when the cost of compliance is higher. Moreover, we illustrate how overlapping policies may lead to paradoxical effects on cumulative emissions.

Suggested Citation

  • Bruninx, Kenneth & Ovaere, Marten & Gillingham, Kenneth & Delarue, Erik, 2019. "The unintended consequences of the EU ETS cancellation policy," MPRA Paper 96437, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:96437
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    File URL: https://mpra.ub.uni-muenchen.de/96437/1/MPRA_paper_96437.pdf
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    References listed on IDEAS

    as
    1. Grischa Perino, 2018. "New EU ETS Phase 4 rules temporarily puncture waterbed," Nature Climate Change, Nature, vol. 8(4), pages 262-264, April.
    2. Severin Borenstein & James Bushnell & Frank A. Wolak & Matthew Zaragoza-Watkins, 2019. "Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design," American Economic Review, American Economic Association, vol. 109(11), pages 3953-3977, November.
    3. Grischa Perino & Robert A. Ritz & Arthur van Benthem, 2019. "Overlapping Climate Policies," NBER Working Papers 25643, National Bureau of Economic Research, Inc.
    4. Grischa Perino & Robert Ritz & Arthur van Benthem, 2019. "Understanding overlapping policies: Internal carbon leakage and the punctured waterbed," Working Papers EPRG1910, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    5. Christoph Bertram & Gunnar Luderer & Robert C. Pietzcker & Eva Schmid & Elmar Kriegler & Ottmar Edenhofer, 2015. "Complementing carbon prices with technology policies to keep climate targets within reach," Nature Climate Change, Nature, vol. 5(3), pages 235-239, March.
    6. Knut Einar Rosendahl, 2019. "EU ETS and the new green paradox," CESifo Working Paper Series 7645, CESifo.
    7. Bruninx, Kenneth & Ovaere, Marten & Delarue, Erik, 2020. "The long-term impact of the market stability reserve on the EU emission trading system," Energy Economics, Elsevier, vol. 89(C).
    8. Reyer Gerlagh & Roweno J. R. K. Heijmans, 2019. "Climate-conscious consumers and the buy, bank, burn program," Nature Climate Change, Nature, vol. 9(6), pages 431-433, June.
    9. Felix Creutzig & Peter Agoston & Jan Christoph Goldschmidt & Gunnar Luderer & Gregory Nemet & Robert C. Pietzcker, 2017. "The underestimated potential of solar energy to mitigate climate change," Nature Energy, Nature, vol. 2(9), pages 1-9, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Corjan Brink & Herman R.J. Vollebergh, 2020. "What Can We Learn from EU ETS?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 18(01), pages 23-29, April.
    2. Grischa Perino & Robert A. Ritz & Arthur van Benthem, 2019. "Overlapping Climate Policies," NBER Working Papers 25643, National Bureau of Economic Research, Inc.
    3. Osorio, Sebastian & Tietjen, Oliver & Pahle, Michael & Pietzcker, Robert C. & Edenhofer, Ottmar, 2021. "Reviewing the Market Stability Reserve in light of more ambitious EU ETS emission targets," Energy Policy, Elsevier, vol. 158(C).
    4. Bruninx, Kenneth & Ovaere, Marten & Delarue, Erik, 2020. "The long-term impact of the market stability reserve on the EU emission trading system," Energy Economics, Elsevier, vol. 89(C).
    5. 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).
    6. Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2022. "The relationship between carbon-intensive fuel and renewable energy stock prices under the emissions trading system," Energy Economics, Elsevier, vol. 114(C).
    7. Jarke-Neuert, Johannes & Perino, Grischa, 2020. "Energy efficiency promotion backfires under cap-and-trade," Resource and Energy Economics, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    European Emission Trading System; Market Stability Reserve; Cancellation; Waterbed; Marginal Abatement Cost;
    All these keywords.

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • 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

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