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Endogenous Emission Caps Always Induce a Green Paradox

  • Series
  • Speaker(s)
    Knut Einar Rosendahl (Norwegian University of Life Science, Norway)
  • Field
    Spatial Economics
  • Location
    Tinbergen Institute
  • Date and time

    October 24, 2019
    12:15 - 13:15

For any emission trading system (ETS) with quantity-based endogenous supply of allowances, there exists a negative demand shock, e.g. induced by abatement policy, that increases aggregate supply and thus cumulative emissions. We prove this green paradox for a general model and then apply it to the details of EU ETS. In 2018, new rules for a Market Stability Reserve (MSR) were agreed on and implemented. We show that abatement policies announced in early periods but realized in the future, are inverted by the new rules and increase cumulative emissions. We provide quantitative evidence of our result for a model disciplined on the price rise in the EU ETS that followed the introduction of the MSR.

Joint with Reyer Gerlagh and Roweno Heijmans.