Energiewirtschaftliches Institut an der Universität zu Köln gGmbH

CESifo Area Conference on Energy and Climate Economics 2020

CESifo Area Conference on Energy and Climate Economics 2020

October 1st/2nd | virtual | On 1-2 October 2020, the Area Conference on Energy & Climate Economics of CESifo takes place, after being canceled in March this year as a result of COVID-19.

Martin Hintermayer, Research Associate at the EWI, will give a presentation on “How does the EU ETS reform impact allowance prices? The role of myopia, hedging requirements and the Hotelling rule” (joint work with Johanna Bocklet) at the CESifo. His talk will take place on October 1st at 3.30 pm.

Martin Hintermayer is also nominated for the Distinguished CESifo Affiliate Award.

Abstract of the presentation:
This paper uses a discrete-time partial equilibrium model of the European Emissions Trading System (EU ETS) to analyze the impact of the recent reform on allowance prices. By including bounded rationality such as myopia or hedging requirements, we find that the Hotelling price path is no longer visible ex-post even though the Hotelling price rule holds ex-ante in the decision making of the firms. Myopia and hedging requirements have little impact in the pre-reform market but strongly drive market outcomes after the reform. In the post-reform market, hedging requirements in combination with restrictive allowance supply may even cause a physical shortage of allowances. Yet, neither form of bounded rationality can fully explain the market outcomes in the third trading period of the EU ETS. If myopia and hedging requirements are considered simultaneously, the price increase in the EU ETS can be attributed to the reform fundamentals.