Robert Marschinski

To link or not to link: benefits and disadvantages of linking cap-and-trade systems

A framework was devised for policy-makers to assess direct bilateral cap-and-trade linkages. A systematic analysis of the economic, political and regulatory implications indicates potential benefits along with a number of potentially negative sideeffects. Theoretically, economic benefits are expected from quasi-static short-term and dynamic efficiency gains. However, a careful review of these arguments indicates that, due to the presence of market distortions or terms-of-trade effects, international emissions trading may not be welfare-enhancing for all countries. Political benefits are derived from the reinforced commitment to international climate policy and the elimination of competitiveness concerns among linking partners, but this must be weighed against the possible incentive to adjust national caps in anticipation of linking. Regulatory disadvantages may arise from the linked systems inconsistency with original domestic policy objectives, and from the partial de facto cession of discretionary control over the domestic emissions trading system. Finally, as an illustration, a link between the EU ETS and a prospective US trading system is assessed, and the major trade-offs identified.

After monetary policy, climate policy: is delegation the key to EU ETS reform?

Since the crash of carbon prices in phase II of the European Union Emissions Trading System (EU ETS), many have argued that the low price mirrors structural failures requiring intervention. A wide range of reform options have been suggested, including delegating the governance of the carbon market to an independent authority. This article analyses the debate by reconstructing the various arguments for or against reform. Three possible drivers of the price decline are investigated: (1) exogenous shocks; (2) insufficient credibility; and (3) market imperfections. It is argued that the extent to which a low price is problematic and warrants reform depends on the specific objectives associated with the EU ETS and the perception on the functioning of the market. A two-dimensional EU ETS Reform Space, comprising the degree of price certainty within the EU ETS and the level of delegation, is devised. Within the Reform Space, EU ETS reform options currently discussed are mapped. This descriptive structure offers a framework to clarify whether delegation responds to various concerns with respect to the EU ETS. Delegation might enhance flexibility under unforeseen circumstances, decrease policy uncertainty, and increase the credibility of long-term policy commitments. However, higher degrees of delegation face challenges including democratic legitimacy and political feasibility. Policy relevance In January 2014, the European Commission proposed a structural reform of the EU ETS characterized by a quantity triggered Market Stability Reserve, increasing flexibility in allowance supply. However, intense debate has revealed considerable differences in opinion regarding the need for and objectives of any adjustment mechanism. Other proposals, including various degrees of delegation to a rule-based adjustment mechanism or an independent authority as well as degrees of price certainty, were also suggested. This article offers a new framework, the EU ETS Reform Space, to compare reform options more systematically. This work therefore contributes to structuring the policy debate by providing a tool to better understand the merits and demerits of various reform proposals

Do intensity targets control uncertainty better than quotas ? Conditions, calibrations, and caveats

Among policy instruments to control future greenhouse gas emissions, well-calibrated general intensity targets are known to lead to lower uncertainty on the amount of abatement than emissions quotas (Jotzo and Pezzey 2004). The authors test whether this result holds in a broader framework, and whether it applies to other policy-relevant variables as well. To do so, they provide a general representation of the uncertainty on future GDP, future business-as-usual emissions, and future abatement costs. The authors derive the variances of four variables, namely (effective) emissions, abatement effort, marginal abatement costs, and total abatement costs over GDP under a quota, a linear (LIT) and a general intensity target (GIT)-where the emissions ceiling is a power-law function of GDP. They confirm that GITs can yield a lower variance than a quota for marginal costs, but find that this is not true for total costs over GDP. Using economic and emissions scenarios and forecast errors of past projections, the authors estimate ranges of values for key parameters in their model. They find that quotas dominate LITs over most of this range, that calibrating GITs over this wide range is difficult, and that GITs would yield only modest reductions in uncertainty relative to quotas.

Learning the optimal trading strategy

Within a realistic model of the stockmarket, we derive the most successful trading strategy. We first identify the agent who has realized the largest percentual gain and then analyze all the operations this trader has performed during the simulation run. We report them in a proper trading space and we extend the model, introducing an additional operator acting with the help of a look up table derived from a clusterization of space. We discuss the robustness of this optimal strategy, its performance and the applicability to real markets.

Tradable Renewable Quota vs. Feed-In Tariff vs. Feed-In Premium under Uncertainty

We study the performance under uncertainty of three renewable energy policy instruments: Tradable Renewable Quota (TRQ), Feed-In-Tariff (FIT), and Feed-In-Premium (FIP). We develop a stylized model of the electricity market, where renewables are characterized by a positive learning externality, which the regulator aims to internalize. Assuming shocks on the fossil-based electricity supply, renewables supply, or on total electricity demand, we analytically derive the conditions determining the instruments’ relative welfare ranking. Although we generally confirm the key role of the slopes of marginal benefits and costs associated with the policy, the specific ranking depends on which type of uncertainty is considered, and whether shocks are permanent or transitory. However, a high learning rate generally favours the FIT, while TRQ is mostly dominated by the other two instruments. These results are confirmed in a numerical application to the US electricity market, in which the FIP emerges as the most and TRQ as the least robust overall choice.