Bocklet, Johanna Hintermayer, Martin Schmidt, Lukas Wildgrube, Theresa
Year of Publication:
EWI Working Paper No. 19/04
With the increase of the linear reduction factor (LRF), the implementation of the market stability reserve (MSR) and the introduction of the cancellation mechanism (CM), the EU ETS changed fundamentally. We develop a discrete time model of the intertemporal allowance market that accurately depicts these reforms assuming that prices develop with the Hotelling rule as long as the TNAC is non-empty. A sensitivity analysis ensures the robustness of the model results regarding its input parameters. The accurate modelling of the EU ETS allows for a decomposition of the effects of the individual amendments and the evaluation of the dynamic efficiency. The MSR shifts emissions to the future but is allowance preserving. The CM reduces the overall emission cap, increasing allowance prices in the long run, but does not significantly impact the emission and price path in the short run. The increased LRF leads with 9 billion cancelled allowances to a stronger reduction than the CM and is therefore the main price driver of the reform.
Market Stability Reserve Dynamic Optimization Cap and Trade EU ETS Cancellation Mechanism Intertemporal Trading