Munich Personal RePEc Archive

The unintended consequences of the EU ETS cancellation policy

Bruninx, Kenneth and Ovaere, Marten and Gillingham, Kenneth and Delarue, Erik (2019): The unintended consequences of the EU ETS cancellation policy.

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Abstract

With the Phase 4 cancellation provision, the cumulative emissions cap of the EU ETS has become dependent on the amount of surplus allowances and future emissions abatement costs. In this paper, we discuss how the design of the market stability reserve greatly increases uncertainty over cumulative emissions and implies that there will be more cancellation when future abatement is more costly, making the policy more stringent when the cost of compliance is higher. Moreover, we illustrate how overlapping policies may lead to paradoxical effects on cumulative emissions.

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