Endogenizing the cap in a cap-and-trade system: Assessing the agreement on EU ETS phase 4

Publikation: Working paperForskning

In early 2018, a reform of the world’s largest functioning greenhouse gas emissions cap-and-trade system, the EU Emissions Trading System (ETS), was formally approved. The reform changes the main principles of the system by endogenizing the previously fixed emissions cap. We show that the effective emissions cap is now affected by the allowance demand and therefore not set directly by EU policymakers. One consequence of this is that national policies that reduce allowance demand can reduce long-run cumulative emissions, which is not possible in a standard cap-andtrade system. Using a newly developed dynamic model of the EU ETS, we show that policies reducing allowance demand can have substantial effects on cumulative emissions. Our model simulations also suggest that the reform reduces aggregate emissions in both the short and long run, but the long-run impact is substantially larger. Yet, the reform has a small impact on the currently large allowance surplus.
UdgiverDe Økonomiske Råd
Antal sider37
StatusUdgivet - 2018

Bibliografisk note

Working Paper 2018:2, Danish Economic Councils, 2018

ID: 204461748