Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve
Open accessAbstract
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.
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The MSR reduces liquidity in the short run, increasing the risk that the nonborrowing constraint becomes binding, leading to an increase in short-run price volatility.
“The MSR reduces liquidity in the short run, thereby increasing the risk that the nonborrowing constraint becomes binding, leading to an increase in short-run price volatility.”
From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Kollenberg & Taschini (2019)
Changes in the probabilistic distribution of the length of the banking period induced by a reserve mechanism may lead to higher price variability.
“Notably, Kollenberg & Taschini (2019) expand their analysis to risk-averse firms and show that changes in the probabilistic distribution of the length of the banking period induced by a reserve mechanism may lead to higher price variability.”
From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Kollenberg & Taschini (2019)
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- Authors
- Kollenberg, S., & Taschini, L.
- Affiliations
- University of Duisburg-Essen (DE)
- University of Verona (IT)
- Corresponding author
- Taschini, Luca
- ORCID
- Taschini, Luca
- Venue
- European Economic Review
- Publisher
- Elsevier BV
- Published
- 2019-09
- Volume
- 118
- Pages
- 213-226
- ISSN
- 0014-2921 (ISSN-L)
- OpenAlex
- W2293366514
- Cited by
- 48
- References
- 24
- Citations by year
- 2026: 3 · 2025: 6 · 2024: 4 · 2023: 8 · 2022: 10 · 2021: 6 · 2020: 7 · 2019: 3 · 2016: 1
- FWCI
- 8.11
- Type
- journal article
- Language
- en
- Open access
- hybrid
- doi.org
- Licence
- Locations
- European Economic Review (publishedVersion, cc-by)
- London School of Economics and Political Science Theses Online (London School of Economics and Political Science) (acceptedVersion)
- London School of Economics and Political Science Research Online (London School of Economics and Political Science) (submittedVersion)
- Edinburgh Research Explorer (University of Edinburgh) (submittedVersion, cc-by)
- RePEc: Research Papers in Economics (submittedVersion)
- Funders
- Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Social Sciences › Economics, Econometrics and Finance › Finance › Stochastic processes and financial applications
- Social Sciences › Economics, Econometrics and Finance › Finance › Capital Investment and Risk Analysis
- Keywords
- emissions trading, Market Stability Reserve, emission caps, allowance prices, risk premium, risk-averse firms, abatement strategies, uncertainty, EU Emissions Trading System
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