Intertemporal emissions trading and market design: an application to the EU ETS

In this paper, the authors develop a model to assess the market stability reserve, a key feature of reforming the European Union’s emissions trading system (EU ETS). Reforms to the EU ETS have been made in the face of a significant, prolonged downturn in the allowance price. The downturn occurred due to the economic recession and the achievements of overlapping renewable and energy efficiency policies, which reduced emissions independently of the allowance price, and thus the demand for allowances on the market. It was also a response to criticism that the market had failed to display responsiveness to changing economic circumstances.