Market Stability Reserve under exogenous shock: The case of COVID-19 pandemic
Open accessAbstract
The EU implemented the Market Stability Reserve (MSR) in response to the 2008 financial crisis to deal with short-term impacts of future shocks, such as the COVID-19 pandemic. We link a model that intertemporally optimizes the handling of banked allowances every five years with one that simulates the annual working of the EU ETS including the MSR with its potential cancelling. Neglecting the pandemic, 2.16 billion allowances are cancelled. Accounting for the pandemic, 0.28 billion additional allowances are cancelled if the European economy fully recovers by 2021, which even overcompensates the 2020 drop in CO2 emissions. Additional cancelling increases when the pandemics lasts longer, meaning that the MSR even outperforms its initial purpose. Thus, we conclude that no additional policy measures to support abatement are required in response to the COVID-19 pandemic.
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The EU ETS is being put to the test by three large shocks: a temporary negative allowance demand shock from COVID-19 lockdowns, a positive or negative allowance demand change from the NextGenerationEU recovery stimulus package, and a permanent negative allowance supply adjustment from the EU's more ambitious EU ETS emissions reduction target of 61% by 2030 compared to 2005 levels.
“The European Union Emissions Trading System (EU ETS), a cornerstone of EU climate policy, is being put to the test by three large shocks affecting the demand for or supply of emission allowances: a temporary negative allowance demand shock because COVID-19 lockdowns reduced energy demand1–3, a positive or negative allowance demand change because of overlapping policies from the NextGenerationEU”
From COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV (2022) · cites this paper as [1]
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- Authors
- Azarova, V., & Mier, M.
- Affiliations
- Ifo Institute for Economic Research (DE)
- Venue
- Applied Energy
- Publisher
- Elsevier BV
- Published
- 2021-02
- Volume
- 283
- Pages
- 116351
- ISSN
- 0306-2619 (ISSN-L)
- PMC
- PMC8959469
- OpenAlex
- W3113027267
- Cited by
- 35
- References
- 43
- Citations by year
- 2026: 2 · 2025: 4 · 2024: 4 · 2023: 9 · 2022: 12 · 2021: 4
- FWCI
- 5.31
- Type
- journal article
- Language
- en
- Open access
- green
- www.ncbi.nlm.nih.gov
- Locations
- Applied Energy (publishedVersion)
- PubMed Central (publishedVersion)
- PubMed (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Funders
- German Federal Ministry for Economic Affairs and Energy (020E100374092))
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Social Sciences › Law › EU Law and Policy Analysis
- Physical Sciences › Environmental Science › Global and Planetary Change › COVID-19 impact on air quality
- Keywords
- Market Stability Reserve, EU Emissions Trading System, COVID-19 pandemic, carbon allowances, external shocks, CO2 emissions, climate policy, 2008 financial crisis
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