By Simon Quemin and Raphaël Trotignon
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.
You may find also the summary for policy makers on the London School of Economics and Political Science website
An earlier version of this working paper was published in January 2019 under the title Intertemporal emissions trading and market design: An application to the EU ETS, which is available upon request