Banning Banking in EU Emissions Trading?

Admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter-temporal flexibility: cost
savings can be traded over time. However, unless individual EU Member States (MS) decide differently, the transfer of unused
allowances from the period of 2005–2007 into the first commitment period under the Kyoto Protocol, i.e. 2008–2012, will be
prohibited. In this paper, we first explore the implications of such a ban on banking when initial emission targets are lenient. This
analysis is based on a simulation whichwas recently carried out in Germany withcompanies and witha student control group. The
findings suggest that a EU-wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack
of inter-temporal flexibility. Second, we use simple game-theoretic considerations to argue that, under reasonable assumptions, such
a EU-wide ban on banking will be the equilibrium outcome. Thus, to avoid a possible prisoners’ dilemma, MS should have coordinated
their banking decisions.