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  Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion

Tietjen, O., Lessmann, K., Pahle, M. (2021): Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion. - Resource and Energy Economics, 63, 101214.
https://doi.org/10.1016/j.reseneeco.2020.101214

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Tietjen, Oliver1, Author              
Lessmann, Kai1, Author              
Pahle, Michael1, Author              
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1Potsdam Institute for Climate Impact Research, ou_persistent13              

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 Abstract: Cap-and-trade programs such as the European Union's Emissions Trading System (EU ETS) expose firms to considerable risks, to which the firms can respond with hedging. We develop an intertemporal stochastic equilibrium model to analyze the implications of hedging by risk-averse firms. We show that the resulting time-varying risk premium depends on the size of the permit bank. Applying the model to the EU ETS, we find that hedging can lead to a U-shaped price path, because prices initially fall due to negative risk premiums and then rise as the hedging demand declines. The Market Stability Reserve (MSR) reduces the permit bank and thus, increases the hedging value of the permits. This offers an explanation for the recent price hike, but also implies that prices may decline in the future due to more negative risk premiums. In addition, we find higher permit cancellations through the MSR than previous analyses, which do not account for hedging.

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 Dates: 2020-12-312021-01-07
 Publication Status: Finally published
 Pages: -
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 Table of Contents: -
 Rev. Type: Peer
 Identifiers: DOI: 10.1016/j.reseneeco.2020.101214
MDB-ID: Entry suspended
PIKDOMAIN: RD3 - Transformation Pathways
Organisational keyword: RD3 - Transformation Pathways
Research topic keyword: Carbon Pricing
Research topic keyword: Climate Policy
Research topic keyword: Economics
Research topic keyword: Energy
Regional keyword: Europe
Working Group: Climate & Energy Policies
OATYPE: Green Open Access
 Degree: -

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Title: Resource and Energy Economics
Source Genre: Journal, SCI, Scopus
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Pages: - Volume / Issue: 63 Sequence Number: 101214 Start / End Page: - Identifier: CoNE: https://publications.pik-potsdam.de/cone/journals/resource/Resource-Energy-Economics
Publisher: Elsevier