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Banning banking in EU emissions trading?

: Schleich, J.; Ehrhart, K.-M.; Hoppe, C.; Seifert, S.


Energy policy 34 (2006), No.1, pp.112-120
ISSN: 0301-4215
Journal Article
Fraunhofer ISI ()
emission trading; climate policy; banking

Admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter-temporal flexibility: cost savings can be traded over time. However, unless individual EU Member States (MS) decide differently, the transfer of unused allowances from the period of 2005-2007 into the first commitment period under the Kyoto Protocol, i.e. 2008-2012, will be prohibited. In this paper, we first explore the implications of such a ban on banking when initial emission targets are lenient. This analysis is based on a simulation which was recently carried out in Germany with companies and with a student control group. The findings suggest that a EU-wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of inter-temporal flexibility. Second, we use simple game-theoretic considerations to argue that, under reasonable assumptions, such a EU-wide ban on banking will be the equilibrium outcome. Thus, to avoid a possible prisoners' dilemma, MS should have co-ordinated their banking decisions.