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Dynamic supply adjustment and banking under uncertainty in an Emission Trading Scheme: the Market Stability Reserve

Kollenberg, Sascha and Taschini, Luca (2019) Dynamic supply adjustment and banking under uncertainty in an Emission Trading Scheme: the Market Stability Reserve. European Economic Review, 118. pp. 213-226. ISSN 0014-2921

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Identification Number: 10.1016/j.euroecorev.2019.05.013

Abstract

We study the impact of a supply management mechanism (SMM) similar to the Market Stability Reserve proposed in 2015 which preserve the overall emissions cap and we comment on the recent cap-changing amendments. We provide an analytical description of the conditions under which an SMM alters the emissions abatement paths, affecting the expected length of the banking period and its variability. While abatement strategies of risk neutral firms solely depend on the former, for riskaverse firms changes in the latter would lead to higher risk premia, accelerated depletion of the bank and, consequently, further reduction of abatement and allowance prices. Cancellation of part of the reserve could partially outweigh the effect on risk premia sustaining allowance prices.

Item Type: Article
Official URL: https://www.journals.elsevier.com/european-economi...
Additional Information: © 2019 Elsevier B.V.
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GF Human ecology. Anthropogeography
H Social Sciences > HG Finance
J Political Science > JN Political institutions (Europe)
Date Deposited: 29 May 2019 10:42
Last Modified: 20 Oct 2020 07:36
URI: http://eprints.lse.ac.uk/id/eprint/100857

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