COVID-19 Tests the Market Stability Reserve

Abstract

We compare the decrease in energy demand and CO2 emissions in Europe during the financial crisis 2008-2009 with the expected drop in demand and emissions due to COVID-19, and the price response of the EU Emission Trading System (EU ETS). We ask whether the rather limited current price reduction may be due to the Market Stability Reserve (MSR), implemented in the EU ETS between the two crises. Stylized facts and basic theory are complemented with simulations based on a model of the EU ETS. Together, they suggest a mixed result. The MSR stabilizes the EU ETS price in turbulent times, but imperfectly. We show that the more persistent the COVID-19 shock is, the less the MSR is able to serve its purpose.

Suggestions for a Covid-19 Post-Pandemic Research Agenda in Environmental Economics

“…Fortunately, these issues are covered to some degree by other contributions. These topics include, among others, potential changes in behavioural responses such as social norms (van Bergeijk 2020;Howarth et al 2020;Quaas et al 2020), issues related to health economics and disease transmission (Newbold et al 2020;Brock and Xepapadeas 2020;Albers et al 2020), food safety and availability (Kecinski et al 2020), impacts on the Market Stability Reserve (Gerlagh et al 2020), animal disease and wildlife meat trade (Aguirre et al 2020), the valuation of lives and the economic costs and environmental benefits of the lockdowns, stock price reactions (Ramelli and Wagner 2020) and linkages to mobility patterns (Sirkeci and Yucesahin 2020).…”

Waterbed leakage drives EU ETS emissions: COVID-19, the Green Deal & the recovery plan

“…The final effect on 2020 carbon emissions of EU ETS firms is still unclear until the next publication of the total number of allowances in circulation by May 2021 (European Commission, 2020a). Other papers on EU ETS focusing entirely on COVID-19 (Azarova and Mier, 2020;Gerlagh et al, 2020a) all study three alternative scenarios regarding the severity and duration of the negative demand shock, similar to a U-shaped fast recovery, a V-shaped gradual recovery, and a profound recession or permanent demand shock.…”

Global Trends in the Innovation and Diffusion of Climate Change Mitigation Technologies

“…Past econometric evidence shows that the EU ETS increased patenting in regulated rms vis-à-vis unregulated rms by up to 10% 20 , but low carbon prices likely weaken that effect. While EU ETS prices have risen since 2018, the recent decline in oil and gas prices due to the COVID-19 pandemic may continue to weaken incentives for CCMT-inventions until fossil fuel prices fully recover 21 .…”