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Emissions trading with rolling horizons

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Quemin, Simon, Trotignon, Raphaël·2021·Journal of Economic Dynamics and Control
DOI 10.1016/j.jedc.2021.104099
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Abstract

We build a model of competitive emissions trading under uncertainty with supply-side control. Firms can use rolling planning horizons to deal with uncertainty and can also exhibit bounded responsiveness to the control. We tailor the model to the EU ETS, calibrate it to 2008-2017 market developments and find that a rolling horizon is able to reconcile the banking dynamics with discount rates implied from futures' yield curves. We evaluate the 2018 market reform, decompose the impacts of its main features and quantify how they hinge on the firms' horizon and responsiveness. We highlight important implications for policy design and evaluation.

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Crossref · 10.1016/j.jedc.2021.104099

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  • In models with a limited horizon, market participants do not consider the challenges further in the future and will abate less, which decreases cumulative invalidation.

    “Indeed, in models with a limited horizon26 market participants do not consider the challenges further in the future and will abate less, which decreases cumulative invalidation.”

    From COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV (2022) · cites this paper as [26]

    The Introduction (p. unavailable) reports greater cumulative cancellations under a rolling finite horizon than an infinite horizon—10 versus 5 GtCO₂—not the decrease claimed. Section 5.1 (p. unavailable) also says that, in its reform scenario, the rolling-horizon firm increases abatement and banking, leading to larger MSR intakes. (LLM, conf=0.91)

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  • Myopic decision making may lead to shorter waterbed punctures and lower invalidation volumes.

    “Myopic decision making26 may lead to shorter waterbed punctures and lower invalidation volumes.”

    From COVID-19, Green Deal and recovery plan permanently change emissions and prices in EU ETS Phase IV (2022) · cites this paper as [26]

    Section 5.4 (page unavailable) finds a smaller waterbed puncture under a rolling horizon, supporting a lower marginal impact from an emissions-demand shift. It does not establish a shorter-lived puncture: the paper says the rolling-horizon puncture remains stable across shift years and that the reserve’s intake cut-off occurs later. The Introduction (page unavailable) also reports that total cancellations differ between horizons, rather than establishing generally lower invalidation volumes under myopic decision-making. (LLM, conf=0.83)

    Experimental — accuracy not yet measured

  • Quemin & Trotignon (2021) quantify that compared to an infinite horizon, cancellations are doubled with a rolling horizon, and MSR-induced supply changes in response to small one-off demand shocks are even more limited in size and time.

    “For instance, compared to an infinite horizon, cancellations are doubled with a rolling horizon, and MSR-induced supply changes in response to small one-off demand shocks are even more limited in size and time.”

    From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Quemin & Trotignon (2021)

  • When firms use an infinite horizon, their degree of sophistication has little impact on price levels and cumulative cancellations (around 5 GtCO2).

    “When firms use an infinite horizon, their degree of sophistication has little impact on price levels and cumulative cancellations (around 5 GtCO2).”

    From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Quemin & Trotignon (2021)

  • When firms use a rolling finite horizon, their degree of sophistication matters for price trajectories and cumulative cancellations; both are higher with full sophistication, with cancellations of around 10.5 versus 8 GtCO2 without sophistication.

    “When firms use a rolling finite horizon, their degree of sophistication matters for price trajectories and cumulative cancellations. Specifically, both are higher with full sophistication, with cancellations of around 10.5 versus 8 GtCO2 without sophistication.”

    From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Quemin & Trotignon (2021)

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Cites

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1 of the 111 references couldn’t be matched to a known paper.

Research works printed but not linked: 5

  1. Baumol, W. J. & Quandt, R. E. (1964). Rules of Thumb and Optimally Imperfect Decisions. American Economic Review, 54(2), 23-46.
  2. Friedman, M. (1953). Essays in Positive Economics. University of Chicago Press.
  3. Gigerenzer, G. & Todd, P. M. (1999). Simple Heuristics That Make Us Smart. New York: Oxford University Press.
  4. Martin, R., Muûls, M. & Wagner, U. J. (2015). Trading Behavior in the EU Emissions Trading Scheme. In M. Gronwald & B. Hintermann (eds.) Emissions Trading as a Policy Instrument: Evaluation and Prospects, chapter 9, (pp. 213-38). MIT Press.
  5. Quemin, S. (2020). Using Supply-Side Policies to Raise Ambition: The Case of the EU ETS and the 2021 Review. GRI Working Paper 335, London School of Economics.

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Authors
Quemin, S., & Trotignon, R.
Affiliations
Université Paris Sciences et Lettres (FR)
Corresponding author
Quemin, Simon
ORCID
Venue
Journal of Economic Dynamics and Control
Publisher
Elsevier BV
Published
2021-04
Volume
125
Pages
104099
ISSN
0165-1889 (ISSN-L)
DOI
10.1016/j.jedc.2021.104099
OpenAlex
W3016102135
Semantic Scholar
1489f8a678e88f989e66c37901f1e50373d7eed0
Cited by
50
References
111
Citations by year
2026: 9 · 2025: 5 · 2024: 6 · 2023: 7 · 2022: 11 · 2021: 4 · 2020: 3 · 2019: 5
FWCI
5.35
Type
journal article
Language
en
Open access
Licence
Locations
  • Journal of Economic Dynamics and Control (publishedVersion)
  • London School of Economics and Political Science Research Online (London School of Economics and Political Science) (acceptedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
  • London School of Economics and Political Science Research Online (London School of Economics and Political Science) (submittedVersion)
  • Publication Database PIK (Potsdam Institute for Climate Impact Research (PIK)) (submittedVersion)
Funders
  • The London School of Economics and Political Science Grantham Research Institute on Climate Change and the Environment
  • Grantham Foundation for the Protection of the Environment
  • Institut Louis Bachelier
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 › Economics and Econometrics › Energy, Environment, Economic Growth
Keywords
emissions trading, EU Emissions Trading System, emission allowances, Market Stability Reserve, futures contracts, discount rate, cumulative emissions, policy design

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