The long-term impact of the market stability reserve on the EU emission trading system

To provide a strong price signal for greenhouse gas emissions abatement, Europe decided to strengthen the European Union Emissions Trading System (EU ETS) by implementing a market stability reserve (MSR) that includes a cancellation policy and to increase the linear reduction factor from 1.74% to 2....

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Bibliographic Details
Published in:Energy economics 2020-06, Vol.89, p.104746, Article 104746
Main Authors: Bruninx, Kenneth, Ovaere, Marten, Delarue, Erik
Format: Article
Language:English
Subjects:
Alternating direction method of multipliers
Cancellation
Carbon dioxide
Carbon dioxide emissions
Carbon price
Coal
Complementarity
Electricity generation
Emissions
Emissions control
Emissions trading
Energy economics
Energy policy
Environmental policy
European emission trading system
Greenhouse effect
Greenhouse gases
Investment
Investments
Lignite
Market stability reserve
Markets
Mixed complementarity problem
Nuclear energy
Parameter sensitivity
Pollution abatement
Prices
Renewable energy
Sensitivity analysis
Simulation
Solar energy
Solar power
Stability
Uncertainty
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Summary:To provide a strong price signal for greenhouse gas emissions abatement, Europe decided to strengthen the European Union Emissions Trading System (EU ETS) by implementing a market stability reserve (MSR) that includes a cancellation policy and to increase the linear reduction factor from 1.74% to 2.2% after 2020. Results of a detailed long-term investment model, formulated as a large-scale mixed complementary problem, show that this strengthened EU ETS may quadruple EUA prices and may decrease cumulative CO2 emissions with 21.3 GtCO2 compared to the cumulative cap before the strengthening (52.2 GtCO2). Around 40% of this decrease (8.3 GtCO2) is due to the increased linear reduction factor and 60% due to the cancellation policy (13 GtCO2). Without the increased linear reduction factor, the MSR's cancellation policy would decrease emissions by only 4.1 GtCO2, indicating their complementarity. A sensitivity analysis on key model assumptions and parameters reveals that the impact of the MSR is, however, strongly dependent on other policies (e.g., renewable energy targets, nuclear, lignite and coal phase-outs) and cost evolutions of abatement options (e.g., investment cost reductions for wind and solar power). This renders the effective CO2 emissions cap highly uncertain. In our simulation results, cancellation volumes range between 5.6 and 17.8 GtCO2, which is to be compared with our central estimate of 13 GtCO2. We calculate the required linear reduction factors to achieve these CO2 emission reductions without an MSR, which would remove all uncertainty on the cumulative CO2 emissions and interference with other complementary climate or energy policies. •Europe strengthened the market stability reserve in the emission trading system.•We develop a detailed long-term investment model to study the impact of this policy.•Results show that this policy may lay at the root of the quadrupled emission allowance prices.•Cumulative emissions (2017–2061) may decrease by 21.3 GtCO2, of which 13 GtCO2 due to cancellation.•Feedback effect between abatement costs and cancellation renders effective emissions cap highly uncertain.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2020.104746