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Endogenous Emission Caps Always Induce a Green Paradox
Gerlagh,Reyer Heijmans,Roweno J.R.K. Rodendahl,Knut Einar
Gerlagh,Reyer
Heijmans,Roweno J.R.K.
Rodendahl,Knut Einar
Abstract
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.
Description
Date
2019-10-07
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Publisher
CESifo Working Papers
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Keywords
emissions trading, green paradox, EU ETS, environmental policy, dynamic modeling, D59 - Other, E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination, H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies, Q5 - Environmental Economics, Q54 - Climate ; Natural Disasters and Their Management ; Global Warming, Q58 - Government Policy, SDG 8 - Decent Work and Economic Growth, SDG 11 - Sustainable Cities and Communities, SDG 13 - Climate Action
Citation
Gerlagh, R, Heijmans, R J R K & Rodendahl, K E 2019 'Endogenous Emission Caps Always Induce a Green Paradox' CESifo Working Paper, vol. 7862, CESifo Working Papers.