Modelling the EU ETS: Stability through a permit reserve

Department(s)/ Research Infrastructure
Climate Policy
Project Status
Completed Project
Project Duration
since/from 2014 to 2015
Funded by
Mercator Stiftung
Project Manager
Karsten Neuhoff
Project Team/Contacts at DIW Berlin

Project description

The project brings together a research consortium to undertake a model comparison study of the proposed EU ETS Market Stability Reserve. Combining the insights emerging from several models the aim is to provide robust quantitative evidence and enhance the understanding of different options to implement a Market Stability Reserve. Such an analysis can provide policy makers and market participants with a level of confidence in the design of an adjustment mechanism, which is not possible from an individual, compartmentalised, modelling approach. Key questions which have governed the research include:
-How to design a MSR capable of dealing with future uncertainties?
-Given a persistent shock, how effective are different MSR designs in returning the market to equilibrium?

The results of economic modelling are supported by research to better understand the input assumptions surrounding abatement costs, reference case emissions as well as the hedging strategies of entities that participate in the EU ETS. Furthermore, members of the consortium are conducting lab style experiments to understand the behavioural aspects of emission permit markets, which are not captured within economic models.

The project builds from a collaborative approach with industry and policy makers, to ensure their concerns are reflected in the modelling framework. Key research partners include: Resources for the Future, the London School of Economics and Political Sciences, the Centre for European Economic Research, the Climate Economics Chair, the University of Oxford, the Zurich University of Applied Sciences, the University of Michigan, the University of Virginia and the Colorado School of Mines. The project is funded through the Mercator Foundation.