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Rushing the Impatient: Allowance Reserves and the Time Profile of Low-Carbon Investments

  • Grischa PerinoEmail author
  • Maximilian Willner
Article
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Abstract

Postponing the issue date of allowances in a cap-and-trade scheme, by e.g. a reserve mechanism, impacts the time profile of low-carbon investments. If the postponement constrains intertemporal arbitrage, short-term investments increase but long-term investments are deterred. This effect aggravates the shortage of long-term investments at least partially attributed to firms’ impatience. The cancellation of allowances agreed for Phase IV of the EU ETS is suitable to counteract the negative effects of cap-neutral postponement on long-term investments—by making the reserve redundant. All effects crucially depend on how firms form expectations about future allowance prices.

Keywords

Market stability reserve Cap-and-trade Low-carbon investments EU ETS reform 

JEL Classification

Q54 Q55 Q58 

Notes

Compliance with Ethical Standards

Conflict of interest

Grischa Perino is a principal investigator of the research project ‘Energy transition in Northern Germany 4.0’ funded by the German Federal Ministry for Economic Affairs and Energy. Funding received: 590,000 EUR, Dec. 2016–Nov. 2020. There is no direct link between the research grant and the manuscript submitted. Maximilian Willner receives a PhD scholarship by the Konrad-Adenauer Foundation (http://www.kas.de/wf/en/71.3628/). This paper will be part of his thesis. Funding received: approx. 50.000 €, Jul. 2015–Jun. 2018.

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Copyright information

© Springer Nature B.V. 2019

Authors and Affiliations

  1. 1.Department of SocioeconomicsUniversity of HamburgHamburgGermany

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