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Puncturing the Waterbed or the New Green Paradox? The Effectiveness of Overlapping Policies in the EU ETS under Perfect Foresight and Myopia

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  • Schmidt, Lukas

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

Abstract

The latest reform of European Union Emission Trading System (EU ETS) enables overlapping policies, such as national coal phase-outs, to affect total emissions. For evaluating overlapping policies, this paper applies a detailed partial equilibrium model of the EU ETS. Under perfect foresight, overlapping policies decrease total emissions if implemented early on. Though, endogenous cancellation within the EU ETS mitigates the waterbed effect hardly by more than 50%. In contrast, overlapping policies mostly do not affect total emissions significantly or even increase them via the new green paradox effect if implemented late and firms anticipate their long-term impact. If overlapping policies focus on low-cost abatement options, they become more effective in mitigating the waterbed effect, with an effectiveness of up to 60%. The effectiveness of overlapping policies decreases if firms are myopic. Myopia also increases the danger of the new green paradox effect for early implemented overlapping policies. However, the absolute increase in total emissions via the new green paradox remains below a third of today's yearly emissions if overlapping policies permanently reduce allowance demand by 10%.

Suggested Citation

  • 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).
    • Handle: RePEc:ris:ewikln:2020_007
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    References listed on IDEAS

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    Cited by:

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    2. 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).
    3. 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).
    4. Schlund, David & Theile, Philipp, 2022. "Simultaneity of green energy and hydrogen production: Analysing the dispatch of a grid-connected electrolyser," Energy Policy, Elsevier, vol. 166(C).

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    More about this item

    Keywords

    Intertemporal Emission Trading; Overlapping Policies; EU ETS; New Green Paradox; Marginal Abatement Costs; Myopia;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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