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 risk-averse 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.
| Original language | English |
|---|---|
| Pages (from-to) | 213-226 |
| Number of pages | 14 |
| Journal | European Economic Review |
| Volume | 118 |
| Early online date | 4 Jun 2019 |
| DOIs | |
| Publication status | Published - 1 Sept 2019 |
Keywords / Materials (for Non-textual outputs)
- EU ETS Reform
- policy responsiveness
- resilience
- risk-aversion
- Supply Management Mechanism
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Luca Taschini
- Business School - Chair in Climate Change Finance
- Accounting and Finance
- Centre for Business, Climate Change and Sustainability
- Climate Change and Sustainability
- Edinburgh Centre for Financial Innovations
Person: Academic: Research Active