LAUSR

Beginning in 2023, allowances held in the market stability reserve of the EU ETS above the number of allowances auctioned the previous year will be cancelled. In this paper, we analyse the consequences of this new cancellation mechanism. Using numerical analysis, we show that additional national abatement measures now have the potential to reduce total EU ETS emissions. A key insight is that, for this to happen, domestic emission reductions must occur early. How early depends crucially on how the future demand for allowances evolve. To facilitate an understanding of the rather complex system the reformed EU ETS constitutes, we present a series of extensions to the analysis to show how the results are affected by, for example, future emission levels, technological development, optimising agents and speculative trading in allowances.