[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/rff/dpaper/dp-15-30.html
   My bibliography  Save this paper

What Ails the European Union's Emissions Trading System? Two Diagnoses Calling for Different Treatments

Author

Listed:
  • Salant, Stephen W.
Abstract
In theory, how a fixed number of storable pollution permits are allocated in a cap-and-trade trade program should not affect intertemporal prices unless participants fail to receive permit endowments before they plan to use them. "Backloading" can create inefficiency; "frontloading" cannot. The European Union's Emissions Trading System, however, is regarded as a counterexample where frontloading itself is creating inefficiency. This view underlies current policy proposals to backload permits or to create a Market Stability Reserve. The goal of these policies is to shrink the current inventory of permits carried by the private sector without tightening the cap. We question the most prominent theory of why frontloading has been excessive by comparing its implications to a theory that attributes recent movements in the spot price of permits to ongoing regulatory risk of a price collapse much like what occurred in the 1970's in anticipation of the devaluation of the Mexican peso or the sale of massive government gold stockpiles. Correct diagnosis should precede treatment advice: if frontloading is excessive, inefficiency can be eliminated by suitable backloading of permits; if regulatory risk is excessive, however, backloading either directly or with a market stability reserve is unlikely to reduce inefficiency.

Suggested Citation

  • Salant, Stephen W., 2015. "What Ails the European Union's Emissions Trading System? Two Diagnoses Calling for Different Treatments," RFF Working Paper Series dp-15-30, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-15-30
    as

    Download full text from publisher

    File URL: http://www.rff.org/RFF/documents/RFF-DP-15-30.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert M. Solow, 1974. "The Economics of Resources or the Resources of Economics," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 12, pages 257-276, Palgrave Macmillan.
    2. Krasker, William S., 1980. "The `peso problem' in testing the efficiency of forward exchange markets," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 269-276, April.
    3. Makoto Hasegawa & Stephen Salant, 2015. "The Dynamics of Pollution Permits," Annual Review of Resource Economics, Annual Reviews, vol. 7(1), pages 61-79, October.
    4. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-648, August.
    5. Chaton, Corinne & Creti, Anna & Villeneuve, Bertrand, 2009. "Storage and security of supply in the medium run," Resource and Energy Economics, Elsevier, vol. 31(1), pages 24-38, January.
    6. Don Bredin and John Parsons, 2016. "Why is Spot Carbon so Cheap and Future Carbon so Dear? The Term Structure of Carbon Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    7. Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Salant, Stephen W., 2016. "What ails the European Union׳s emissions trading system?," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 6-19.
    2. Holt, Charles A. & Shobe, William M., 2016. "Reprint of: Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 69-86.
    3. Palao, Fernando & Pardo, Ángel, 2021. "The inconvenience yield of carbon futures," Energy Economics, Elsevier, vol. 101(C).
    4. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Salant, Stephen W., 2016. "What ails the European Union׳s emissions trading system?," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 6-19.
    2. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    3. Simon Quemin & Raphael Trotignon, 2018. "Competitive Permit Storage and Market Design: An Application to the EU-ETS," Working Papers 2018.19, FAERE - French Association of Environmental and Resource Economists.
    4. Gérard Gaudet, 2007. "Natural resource economics under the rule of Hotelling," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1033-1059, November.
    5. Koch, Nicolas & Grosjean, Godefroy & Fuss, Sabine & Edenhofer, Ottmar, 2016. "Politics matters: Regulatory events as catalysts for price formation under cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 78(C), pages 121-139.
    6. Palao, Fernando & Pardo, Ángel, 2021. "The inconvenience yield of carbon futures," Energy Economics, Elsevier, vol. 101(C).
    7. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    8. Kollenberg, Sascha & Taschini, Luca, 2019. "Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve," European Economic Review, Elsevier, vol. 118(C), pages 213-226.
    9. Ithurbide, Philippe, 1987. "Le marché de l’or et les bulles rationnelles," L'Actualité Economique, Société Canadienne de Science Economique, vol. 63(4), pages 331-356, décembre.
    10. Cagli, Efe Caglar & Taskin, Dilvin & Evrim Mandaci, Pınar, 2019. "The short- and long-run efficiency of energy, precious metals, and base metals markets: Evidence from the exponential smooth transition autoregressive models," Energy Economics, Elsevier, vol. 84(C).
    11. Shahbaz, Muhammad & Hoang, Thi Hong Van & Mahalik, Mantu Kumar & Roubaud, David, 2017. "Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis," Energy Economics, Elsevier, vol. 63(C), pages 199-212.
    12. Ramon Moreno, 2001. "Pegging and stabilization policy in developing countries," Economic Review, Federal Reserve Bank of San Francisco, pages 17-29.
    13. Dale W. Henderson & Stephen W. Salant, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
    14. Grimaud, Andre & Rouge, Luc, 2003. "Non-renewable resources and growth with vertical innovations: optimum, equilibrium and economic policies," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 433-453, March.
    15. Hadi Sasana & Imam Ghozali, 2017. "The Impact of Fossil and Renewable Energy Consumption on the Economic Growth in Brazil, Russia, India, China and South Africa," International Journal of Energy Economics and Policy, Econjournals, vol. 7(3), pages 194-200.
    16. Devarajan, Shantayanan & Fisher, Anthony C, 1981. "Hotelling's "Economics of Exhaustible Resources": Fifty Years Later," Journal of Economic Literature, American Economic Association, vol. 19(1), pages 65-73, March.
    17. Wei Wang & Kehui Wei & Oleksandr Kubatko & Vladyslav Piven & Yulija Chortok & Oleksandr Derykolenko, 2023. "Economic Growth and Sustainable Transition: Investigating Classical and Novel Factors in Developed Countries," Sustainability, MDPI, vol. 15(16), pages 1-15, August.
    18. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Barbier, Bruno & Bergeron, Gilles, 2001. "Natural resource management in the hillsides of Honduras: bioeconomic modeling at the micro-watershed level," Research reports 123, International Food Policy Research Institute (IFPRI).
    20. Santos, Lúcia & Soares, Isabel & Mendes, Carla & Ferreira, Paula, 2014. "Real Options versus Traditional Methods to assess Renewable Energy Projects," Renewable Energy, Elsevier, vol. 68(C), pages 588-594.

    More about this item

    Keywords

    cap and trade; emissions trading; market stability reserve; peso problem; regulatory uncertainty;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rff:dpaper:dp-15-30. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Resources for the Future (email available below). General contact details of provider: https://edirc.repec.org/data/rffffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.