Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion

Cap-and-trade programs such as the European Union's Emissions Trading System (EU ETS) expose firms to considerable risks, which can respond with hedging. We develop an intertemporal stochastic equilibrium model analyze implications of hedging by risk-averse firms. show that resulting time-varying risk premium depends on size permit bank. Applying EU ETS, we find lead a U-shaped price path, because prices initially fall due negative premiums and then rise demand declines. The Market Stability Reserve (MSR) reduces bank thus, increases value permits. This offers explanation for recent hike, but also implies may decline in future more premiums. In addition, higher cancellations through MSR than previous analyses, do not account