On the Theory of Emissions Trading - Applications to the EU ETS

This thesis comprises four research articles covering different aspects of emissions trading systems and, in particular, the EU ETS. Chapter 2 decomposes the different amendments of the EU ETS reform and evaluates the cost effectiveness of the single amendments. It finds that the increased Linear Reduction Factor has the most significant impact on the reformed EU ETS. Chapter 3 analyzes the effects of a carbon price floor in the reformed EU ETS and compares two different designs of a CPF. The buyback design raises the market price immediately to the discounted level, whereas the top-up tax causes ambiguous effects depending on the precise design. Chapter 4 includes behavioral aspects such as myopia and risk aversion into the model of the reformed EU ETS. The observed market outcomes between 2013 and 2019 can be replicated with a combination of myopic firms and hedging requirements. Finally, Chapter 5 challenges a common assumption on the shape of marginal abatement cost curves and discusses the implications for the EU ETS. Marginal abatement cost curves are convex and flatten over time, which alters the banking rationale of firms in the EU ETS.