Endogenous Emission Caps Always Induce a Green Paradox

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7862

Classification and Topics

• Classification: Wirtschaft ; General Equilibrium and Disequilibrium: Other ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; Environmental Economics: General ; Climate; Natural Disasters and Their Management; Global Warming ; Environmental Economics: Government Policy
• Subject: emissions trading ; green paradox ; EU ETS ; environmental policy ; dynamic modeling

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gerlagh, Reyer ; Heijmans, Roweno J.R.K. ; Rosendahl, Knut Einar
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/207253
• Last update: 10.03.2025, 11:42 AM CET