The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The supply of allowances in the European Union Emissions Trading System is determined within a rigid allocation programme. A reform of the EU ETS intends to make allowances allocation exible and contingent on the state of the system. We model the emissions market under adjustable allowance supply in a stochastic partial equilibrium framework and obtain closed form solutions for its dynamics. The model considers a supply control mechanism contingent on the number of allocated and unused allowances, as suggested by the European Commission. We derive analytical dependencies between the allowance allocation adjustment rate and the market equilibrium dynamics, which allows us to represent the quantity thresholds as quantiles for the number of allocated and unused allowances. Finally, we present an analytical tool for the selection of an optimal adjustment rate under both risk-neutrality and riskaversion. We thereby provide an analytical foundation for the regulator's decision-making in the context of the EU ETS reform and give a novel perspective on the mechanism's overall design. Terms of use: Documents inKeywords: EU ETS reform, policy design, responsiveness, resilience, supply management mechanism, risk-aversion. Sascha Kollenberg Chair for Energy Trading and FinanceUniversity

Combining Price and Quantity Controls Under Partitioned Environmental Regulation

“…Second, a small number of recent papers examines the idea of introducing a quantity-based adjustment mechanism to the EU ETS (Fell, 2015;Schopp et al, 2015;Kollenberg & Taschini, 2015;Ellerman et al, 2015;Perino & Willner, 2015). The so-called "Market Stability Reserve (MSR)"-to be introduced in Phase 4 of the EU ETSaims at rectifying the structural problem of allowances surplus by creating a mechanism according to which annual auction volumes are adjusted in situations where the total number of allowances in circulation is outside a certain predefined range (EC, 2014).…”

“…The so-called "Market Stability Reserve (MSR)"-to be introduced in Phase 4 of the EU ETSaims at rectifying the structural problem of allowances surplus by creating a mechanism according to which annual auction volumes are adjusted in situations where the total number of allowances in circulation is outside a certain predefined range (EC, 2014). As long as the MSR is conceived as altering the environmental target (see, for example, Kollenberg & Taschini, 2015), it can be interpreted as a mechanism to achieve ex-post efficiency in European carbon market.…”

ADAPT: A Price-Stabilizing Compliance Policy for Renewable Energy Certificates: The Case of SREC Markets

“…While only very limited literature on stochastic modeling of SREC markets exists (see [1,8,16]), carbon emissions markets have attracted much more attention (see [7,13]), including recent studies of the Market Stability Reserve's likely impact on prices ( [15,19]). However, various key differences between carbon and REC markets require careful consideration, including the opposite roles for supply and demand, the typical 'withdrawal' rule reducing incentives for banking, the possibility of unlimited banking, and the wide range of factors affecting carbon emissions abatement, notably volatile fuel prices and power demand.…”

The Best (and Worst) of GHG Emission Trading Systems: Comparing the EU ETS with Its Followers

“…13 At the moment of writing, the Decision of the European Parliament and of the Council concerning the establishment and operation of a market stability reserve is still awaiting publication on the Official Journal of the European Union. 14 Source: European Commission, http://ec.europa.eu/clima/policies/ets/reform/ index_en.htm 15 See Kollenberg and Taschini (2016) for a theoretical model that investigates the potential consequences of the market stability reserve mechanism using a stochastic partial equilibrium framework. Best (and Worst) expectations about them), rather than a result of the interplay of market supply and demand".…”