Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/207253 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7862
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
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.
Subjects: 
emissions trading
green paradox
EU ETS
environmental policy
dynamic modeling
JEL: 
D59
E61
H23
Q50
Q54
Q58
Document Type: 
Working Paper
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