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The Reformed EU ETS in Times of Economic Crises: the Case of the COVID-19 Pandemic

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  • Bocklet, Johanna

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

Abstract

To tackle structural supply-demand imbalances and to increase price stability in times of economic crises, policy makers reformed the European Union Emission Trading System (EU ETS) substantially in 2015 and 2018. As the COVID-19 pandemic led to an unforeseen contraction of the economy, it serves as an example to evaluate if the reforms can live up these goals. The paper at hand uses a partial equilibrium model that depicts current EU ETS regulation to determine the impact of the pandemic on allowance prices and emissions the EU ETS. The results indicate that due to the Market Stability Reserve (MSR) and the Cancellation Mechanism, the Corona crisis reduces aggregate emissions in the EU ETS. This finding holds even if the crisis is followed by an economic rebound in the same or larger magnitude than the initial recession. Further, the new regulation increases the robustness of the ETS towards economic shocks as the reforms increase the relative price stability in the market. While these findings hold for the COVID-19 pandemic, the results can yet not be generalized to a generic economic crisis since they strongly depend on the shape, size and timing of the exogenous shock.

Suggested Citation

  • 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).
    • Handle: RePEc:ris:ewikln:2020_010
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    More about this item

    Keywords

    Dynamic Optimization; EU ETS; COVID-19; Market Stability Reserve; Economic Shock;
    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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