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European carbon market: lessons on the impact of a market stability reserve using the Zephyr model

Author

Listed:
  • Raphaël Trotignon
  • Pierre-André Jouvet
  • Boris Solier
  • Simon Quemin
  • Jérémy Elbeze
Abstract
In January 2014, the European Commission proposed the introduction of a Market Stability Reserve (MSR) to improve the functioning of the European carbon emission trading scheme. This article is an attempt to enlighten the possible effects of such a reserve on the functioning of the EU ETS using the behavior-based simulation model Zephyr, specifically designed for representing imperfect inter-temporal compliance behavior in a simple framework. Our results suggest that the MSR can indeed raise the price in the short-medium term, reduce the number of allowances in circulation and foster earlier emission reductions. Nevertheless, it would do so at the expense of higher overall costs, because allowances are unlikely to be returned entirely to the market when needed, thus reinforcing the cap. The MSR also does not seem to have the desired dampening effect in case of external shocks. We conclude that although the MSR can help trigger early abatement and put Europe on a more ambitious abatement pathway over the long term, in the frame of our methodology, it seems unlikely that such a reserve make market participants and the public authority more able to deal with uncertainties in the future.

Suggested Citation

  • Raphaël Trotignon & Pierre-André Jouvet & Boris Solier & Simon Quemin & Jérémy Elbeze, 2015. "European carbon market: lessons on the impact of a market stability reserve using the Zephyr model," Working Papers 1511, Chaire Economie du climat.
    • Handle: RePEc:cec:wpaper:1511
    as

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    File URL: http://www.chaireeconomieduclimat.org/RePEc/cec/wpaper/15-10-Cahier-R-2015-11-Trotignon-et-al.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Chaton, Corinne & Creti, Anna & Sanin, María-Eugenia, 2018. "Assessing the implementation of the Market Stability Reserve," Energy Policy, Elsevier, vol. 118(C), pages 642-654.
    2. Sascha Kollenberg & Luca Taschini, 2015. "The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment," CESifo Working Paper Series 5380, CESifo.
    3. Azarova, Valeriya & Mier, Mathias, 2021. "Market Stability Reserve under exogenous shock: The case of COVID-19 pandemic," Applied Energy, Elsevier, vol. 283(C).
    4. Christian Gollier and Jean Tirole, 2015. "Negotiating effective institutions against climate change," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).

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    More about this item

    Keywords

    EU ETS; Market Stability Reserve (MSR); Simulation model; Governance;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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