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Journal Article

The European Union Emissions Trading System Market Stability Reserve: Does It Stabilize or Destabilize the Market?

Authors

Perino,  Grischa
External Organizations;

Willner,  Maximilian
External Organizations;

/persons/resource/quemin

Quemin,  Simon
Potsdam Institute for Climate Impact Research;

/persons/resource/Michael.Pahle

Pahle,  Michael
Potsdam Institute for Climate Impact Research;

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Citation

Perino, G., Willner, M., Quemin, S., Pahle, M. (2022): The European Union Emissions Trading System Market Stability Reserve: Does It Stabilize or Destabilize the Market? - Review of Environmental Economics and Policy, 16, 2, 338-345.
https://doi.org/10.1086/721015


Cite as: https://publications.pik-potsdam.de/pubman/item/item_27329
Abstract
The Market Stability Reserve (MSR) was introduced into the European Union Emissions Trading System to address a historical surplus of emission allowances and to improve the system’s resilience to major shocks through automatic adjustments to the supply of allowances. We summarize the main strengths and weaknesses of the MSR and identify when it stabilizes the market as intended, as well as when it is destabilizing. We argue that recently proposed design changes strengthen both its stabilizing and destabilizing effects. We conclude that a price-based supply adjustment mechanism would help to address the main shortcomings rooted in the banking-based approach of the current MSR design.