Consulting the chrystal ballː Firm's foresight and a cap-and-trade scheme with endogenous supply adjustments

The latest reform of the European Emissions Trading System (EU ETS) will set in mo- tion range of changes to the scheme including the Market Stability Reserve (MSR). It will postpone the issue date of allowances as a function of the unused allwances in circulation, i.e. the so-called 'surplus', and cancel allowances as a function of the reserve size from 2023 onwards. Both aspects of the MSR have implications for market outcomes which in turn depend on the nature of foresight experienced by market participants. We distin- guish between perfect, limited and imperfect foresight and analyze a perfectly competitive allowance market by a partial equilibrium model in discrete time. Our investigation yields that the current design put in place by the reform is only sensible if two market fail- ures are taken into account: excessive supply by the regulator and regulated entities not experiencing perfect foresight.