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How does the EU ETS reform impact allowance prices? The role of myopia, hedging requirements and the Hotelling rule

Author

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  • Bocklet, Johanna

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

  • Hintermayer, Martin

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

Abstract

This paper uses a discrete-time partial equilibrium model of the European Emissions Trading System (EU ETS) to analyze the impact of the recent reform on allowance prices. By including bounded rationality such as myopia or hedging requirements, we find that the Hotelling price path is no longer visible ex-post even though the Hotelling price rule holds ex-ante in the decision making of the firms. Myopia and hedging requirements have little impact in the pre-reform market but strongly drive market outcomes after the reform. In the post-reform market, hedging requirements in combination with restrictive allowance supply may even cause a physical shortage of allowances. Yet, neither form of bounded rationality can fully explain the market outcomes in the third trading period of the EU ETS. If myopia and edging requirements are considered simultaneously, the price increase in the EU ETS can be attributed to the reform fundamentals.

Suggested Citation

  • Bocklet, Johanna & Hintermayer, Martin, 2020. "How does the EU ETS reform impact allowance prices? The role of myopia, hedging requirements and the Hotelling rule," EWI Working Papers 2020-1, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2020_001
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    References listed on IDEAS

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    Cited by:

    1. Wildgrube, Theresa, 2022. "Fit for 55? An assessment of the effectiveness of the EU COM's reform proposal for the EU ETS," EWI Working Papers 2022-4, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    2. 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).
    3. Michele Azzone & Roberto Baviera & Pietro Manzoni, 2024. "The puzzle of Carbon Allowance spread," Papers 2405.12982, arXiv.org.
    4. Hintermayer, Martin, 2020. "A carbon price floor in the reformed EU ETS: Design matters!," Energy Policy, Elsevier, vol. 147(C).
    5. Sitarz, Joanna & Pahle, Michael & Osorio, Sebastian & Luderer, Gunnar & Pietzcker, Robert, 2023. "EU carbon prices signal high policy credibility and farsighted actors," EconStor Preprints 280455, ZBW - Leibniz Information Centre for Economics.
    6. 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).
    7. Joanna Sitarz & Michael Pahle & Sebastian Osorio & Gunnar Luderer & Robert Pietzcker, 2024. "EU carbon prices signal high policy credibility and farsighted actors," Nature Energy, Nature, vol. 9(6), pages 691-702, June.
    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. 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).

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    More about this item

    Keywords

    Dynamic Optimization; EU ETS; Bounded Rationality; Hotelling; Hedging; Myopia;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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