Assessing the implementation of the Market Stability Reserve. (July 2018)

• Record Type: Journal Article
• Authors: Chaton, Corinne; Creti, Anna; Sanin, María-Eugenia
• Is Part Of: Energy policy. Volume 118(2018)
• Page Start: 642
• Page End: 654
• Publication Date: 2018-07
• Subjects: D43 -- L13 -- Q2; ETS -- Market Stability Reserve -- MSR -- Banking; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2018.03.027
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: In October 2015 the European Parliament has established a Market Stability Reserve (MSR) in the Phase 4 of the EU-ETS, as part of the 2030 framework for climate policies. In this paper we model the EU-ETS in presence of the Market Stability Reserve (MSR) as it is defined by that decision and investigate the impact that such a measure has in terms of permits price, output production and banking strategies. To do so we build an inter-temporal model in which polluting firms competing in an homogeneous good market are price takers in a permits market and face an uncertain demand. Our main finding is that the MSR succeeds in increasing the permits' price correcting an excess supply (and conversely decreasing it in case of excess demand). However, when the output demand is stochastic, the MSR may alter the arbitrage conditions that determine permits' prices. In some cases which depend on the extend of the demand variation, unintended effects on the price pattern appear. This in turns may adversely affect welfare. Abstract : Highlights: We model the functioning of the stability reserve mechanism in the EU ETS. We focus on the interaction between the reserve and firms' option to delay banking. The reserve can modify private banking and have unintended effects on the carbon price. We recommend policy makers to take into account these possible dynamic effects to avoid inefficient policies.