An integrated model for the analysis of the EU ETS

Abstract

The European Emissions Trading System (EU ETS) is the main instrument of the European Union (EU) against climate change. This mechanism is considered, from the theoretical point of view, as the most cost-effective method to reduce the greenhouse gases (GHG). However, previous studies show that the agents who participate in these kind of markets can behave in a way which may lead to inefficient CO2 prices, giving rise to doubts about the effectiveness of the system. This paper analyzes these possible anomalies by modeling the EU ETS under rational market behavior and comparing results with real market transactions. For this, we have built a bottom-up model, which represents the EU ETS in an integrated way, paying particular attention to the interactions among the most emissions intensive industries. The results show the benefits of this integrated modeling approach and how it better reflects real market conditions. We also present some preliminary conclusions regarding the behavior of the agents in the ETS market.