The long life times of power plants cause the system
Fig. 1. Response curve of proposed MSR (not scaled to electricity sector of Central Western Europe and Great Britain).Adapted from Tschach et al. (2014).Figure optionsDownload full-size imageDownload as PowerPoint slide
2.3. Uncertain effects of the proposed MSR
2.4. The effect of the MSR on price volatility
The economic rationale behind a MSR is inter-temporal efficiency (Tschach et al., 2014). As discussed in Section 2.1, prices do not correspond to the long-term efficient price signal needed for decarbonisation, since market participants have a higher discount rate than a social planner and will in general bank less than is socially optimal. This problem becomes more pronounced with macro-economic disturbances to an emission-trading scheme, since they Perifosine momentarily reduce scarcity of EUAs.
Table 1 shows for four different situations how the relative scarcity or excess of EUAs over time triggers the response of a MSR (assuming that the changes in banking are large enough to elicit a response). In the long-term structural excess situation, prices are low, since speculative investors are needed to stabilise the CO2 price, who have higher discount rates that are significantly above discount rates of a social planner (Schopp and Neuhoff, 2013). This is current situation of the EU ETS. The MSR would withdraw EUAs in two years time. Since market participants can anticipate the withdrawal, the EUA price would be supported immediately. In a structural shortage, on the other hand, the banking stock is probably reduced, since non-compliance is heavily fined and EUAs would need to be handed in later. In seminiferous tubules case, the MSR would inject EUAs to the market, thus reducing the scarcity. Presumably the MSR has been designed for these two situations.