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  A framework for assessing the performance of cap-and-trade systems: Insights from the European Union Emissions Trading System

Fuss, S., Flachsland, C., Koch, N., Kornek, U., Knopf, B., Edenhofer, O. (2018): A framework for assessing the performance of cap-and-trade systems: Insights from the European Union Emissions Trading System. - Review of Environmental Economics and Policy, 12, 2, 220-241.
https://doi.org/10.1093/reep/rey010

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 Creators:
Fuss, S.1, Author
Flachsland, C.1, Author
Koch, N.1, Author
Kornek, U.1, Author
Knopf, B.1, Author
Edenhofer, Ottmar2, Author              
Affiliations:
1External Organizations, ou_persistent22              
2Potsdam Institute for Climate Impact Research, ou_persistent13              

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 Abstract: The performance of the European Union (EU) Emissions Trading System (ETS) and other cap-and-trade schemes has been under scrutiny because of their inability to create a stable price for greenhouse gas emissions. This article seeks to inform the often confusing debate about the economic performance of cap-and-trade systems over time, with a focus on the EU ETS. Based on a simple intertemporal framework of emissions trading and a review of the literature, we show that different frameworks and notions of efficiency result in both different assessments of performance and different recommended strategies for improving performance. More specifically, we argue that if cap-and-trade systems have temporal flexibility (i.e., they include banking and borrowing of emissions allowances), it can be highly misleading to base the economic assessment on short-term efficiency. We seek to draw attention to the concept of long-term economic performance, which takes into account the intertemporal nature of emissions trading systems. In particular, we identify market and government distortions (e.g., myopia, lack of policy credibility, excessive discounting) that may depress allowance prices and hamper intertemporal efficiency. We then examine whether the recently adopted Market Stability Reserve and the alternative price collar are likely to address these distortions.

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 Dates: 2018
 Publication Status: Finally published
 Pages: -
 Publishing info: -
 Table of Contents: -
 Rev. Type: Peer
 Identifiers: DOI: 10.1093/reep/rey010
PIKDOMAIN: Sustainable Solutions - Research Domain III
eDoc: 8097
Organisational keyword: Director Edenhofer
Research topic keyword: Climate Policy
Research topic keyword: Economics
Research topic keyword: Carbon Pricing
Regional keyword: Europe
 Degree: -

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Title: Review of Environmental Economics and Policy
Source Genre: Journal, SCI, Scopus
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Pages: - Volume / Issue: 12 (2) Sequence Number: - Start / End Page: 220 - 241 Identifier: CoNE: https://publications.pik-potsdam.de/cone/journals/resource/Review-Environmental-Economics-Policy