Re-scheduling production due to the banking restriction in EU emissions trading

Various studies claim that the ban of the European emissions trading regime to transfer unused emission allowances from 2007 to 2008 is likely to result in a significant increase in the certificate prices in 2008. In this paper, we investigate the decisions of firms regarding the time schedules of their production plans in response to this expected price jump. We argue that companies that are able to advance their production and to store the produced goods are induced to shift production activities partially prior to the banking prohibition and, thereby, imitate the banking of emission allowances by storing their output. Since this leads to a temporal demand shift on the allowance market, the anticipated price jump in the first Kyoto period might be mitigated. Perfect arbitrage, however, will not be possible because utilities, which account for more than two-thirds of the CO2-emissions, are unable to store their output and companies from other industry sectors only dispose of limited storage capacities. Hence, the law of one price is unlikely to hold.