Raising climate ambition in emissions trading systems: The case of the EU ETS and the 2021 review
Open accessAbstract
We provide a quantitative assessment of policy options to inform the 2021 review of the EU Emissions Trading System (ETS) and raise climate ambition. We use a permit trading model in which firms utilize rolling finite planning horizons, which replicates historical price and banking developments well compared to an infinite horizon. When firms have bounded foresight, indirectly raising ambition through the Market Stability Reserve (MSR) is not equivalent to directly raising ambition through the emissions cap trajectory. Leveraging the MSR turns out to be efficiency improving as it compensates for firms’ bounded foresight by frontloading abatement efforts. We analyze the MSR interaction with the cap trajectory to exploit synergies and minimize the cost of raising ambition. We also provide a comparative assessment of a complete suite of changes in the MSR parameters. Whatever its parameters, MSR-induced resilience to demand shocks remains limited by design: the MSR acts more as an unconditional price support provider than as a responsive price stabilizer.
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The increase in the marginal intake rate may also aggravate MSR impacts on price stability and make its asymmetric potency in reducing supply versus expanding it even more prevalent.
“The increase in the marginal intake rate may also aggravate MSR impacts on price stability (Gerlagh et al. 2022, Perino 2022) and make its asymmetric potency in reducing supply versus expanding it even more prevalent (Quemin 2022).”
From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Quemin 2022
Section 3.4 says the MSR is designed to contract supply, not expand it, and responds asymmetrically to shocks. It says declining thresholds would amplify that asymmetry through larger and longer intakes, but does not establish that an increase in the intake rate itself would do so. The price-stability clause is attributed to other sources, not Quemin. (LLM, conf=0.82)
Experimental — accuracy not yet measuredQuemin (2022) finds that dynamic MSR thresholds declining over time increase overall cost-effectiveness and alleviate MSR-induced oscillatory behavior.
“Notably, dynamic MSR thresholds declining over time-a feature not taken up in the current reform-are found to increase overall cost-effectiveness and alleviate MSR-induced oscillatory behavior.”
From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Quemin (2022)
Quemin (2022) finds that MSR-induced resilience to shocks always remains limited and one-sided; by design, the MSR acts more as an unconditional price support provider than as a responsive price stabilizer.
“However, MSR-induced resilience to shocks always remains limited and one-sided; i.e., by design, the MSR acts more as an unconditional price support provider than as a responsive price stabilizer.”
From The Market Stability Reserve in the EU Emissions Trading System: A Critical Review (2023) · cites this paper as Quemin (2022)
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References 55 · Cited by 33
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- Authors
- Quemin, S.
- Affiliations
- Université Paris Sciences et Lettres (FR)
- Corresponding author
- Quemin, Simon
- ORCID
- Quemin, Simon
- Venue
- Resource and Energy Economics
- Publisher
- Elsevier BV
- Published
- 2022-05
- Volume
- 68
- Pages
- 101300
- ISSN
- 0928-7655 (ISSN-L)
- OpenAlex
- W4226462798
- Cited by
- 33
- References
- 55
- Citations by year
- 2026: 7 · 2025: 8 · 2024: 5 · 2023: 7 · 2022: 6
- FWCI
- 5.23
- Type
- journal article
- Language
- en
- Open access
- hybrid
- doi.org
- Licence
- Locations
- Resource and Energy Economics (publishedVersion, cc-by)
- London School of Economics and Political Science Research Online (London School of Economics and Political Science) (acceptedVersion)
- London School of Economics and Political Science Theses Online (London School of Economics and Political Science) (submittedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Publication Database PIK (Potsdam Institute for Climate Impact Research (PIK)) (submittedVersion, cc-by)
- Funders
- Grantham Foundation for the Protection of the Environment
- Agence Nationale de la Recherche (ANR-11-LABX-0019, ANR 11)
- Université de Recherche Paris Sciences et Lettres
- Economic and Social Research Council (ES/R009708/1)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Life Sciences › Agricultural and Biological Sciences › General Agricultural and Biological Sciences › Agricultural Economics and Policy
- Social Sciences › Law › EU Law and Policy Analysis
- Keywords
- EU Emissions Trading System, Market Stability Reserve, emissions trading, climate ambition, finite horizon, price stabilization, demand shocks, carbon pricing
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