Procrastinating reform: The impact of the market stability reserve on the EU ETS |
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| Institution: | 1. University of Oxford (Smith School of Enterprise and the Environment; Institute for New Economic Thinking at the Oxford Martin School); ESRC Centre for Climate Change Economics and Policy at the Grantham Research Institute on Climate Change and the Environment, LSE;2. Technical University Berlin;3. Adelphi;4. Resources for the Future;5. Australian National University;1. Mercator Research Institute on Global Commons and Climate Change (MCC), Torgauer Straße 12-15, 10829 Berlin, Germany;2. Potsdam Institute for Climate Impact Research (PIK), PO Box 601203, 14412 Potsdam, Germany;3. Technical University Berlin, Strasse des 17. Juni 135, 10623 Berlin, Germany;1. Université d''Evry Val d''Essonne, EPEE, and Ecole Polytechnique, Paris;2. Aarhus University, CREATES, Denmark;3. Université Franche-Comté, CRESE, Besançon, France;1. University of Michigan, United States;2. University of Maryland, United States;3. Resources for the Future (RFF), United States;1. PBL Netherlands Environmental Assessment Agency, The Netherlands;2. CentER and Tilburg Sustainability Centre, Tilburg University, The Netherlands;3. Environmental Economics and Natural Resources Group, Wageningen University, The Netherlands;4. CESifo, Munich, Germany |
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| Abstract: | We study the impact of the market stability reserve (MSR) on price and emission paths of the EU ETS. From 2019 onwards, the MSR will adjust the number of allowances auctioned as a function of the size of the surplus, i.e. in times of a large surplus it shifts the issue date of allowances into the future. In a perfectly competitive allowance market the MSR only affects price and emission paths if the baseline equilibrium becomes unfeasible. If the MSR is binding, prices increase in the short run but drop in the medium run relative to the baseline. The MSR increases price variability if uncertainty over future allowance demand is resolved while there is a surplus. The long run cap is unaffected by both the MSR and overlapping climate policies. This contrasts the EU?s objectives of improving the resilience of the EU ETS and increasing synergies with overlapping climate policies. |
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| Keywords: | Market stability reserve Cap-and-trade EU ETS reform Price variability Overlapping policies |
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