Comparing Policies to Confront Permit Over-allocation

Harrison Fell

RFF Working Paper Series from Resources for the Future

Abstract: Instability in cap-and-trade markets, particularly with respect to permit price collapses has been an area of concern for regulators. To that end, several policies, including hybrid price-quantity mechanisms and the newly introduced "market stability reserve" (MSR) systems have been introduced and even implemented in some cases. I develop a stochastic dynamic model of a cap-and-trade system, parameterized to values relevant to the European Union's Emission Trading System (EU ETS) to analyze the performance of these policies aimed at adding stability to the system or at least at reducing perceived over-allocations of permits. Results suggest adaptive allocation mechanisms such as a price collar or MSR can reduce permit over-allocations and permit price volatility in a more cost-effective manner than simply reducing scheduled permit allocations. However, it is also found that the performance of these adaptive allocation policies, and in particular the MSR, are greatly affected by assumed discount rates and policy parameters.

Keywords: cap-and-trade; market stability reserve; price collar; EU ETS (search for similar items in EconPapers)
Date: 2015-06-25
New Economics Papers: this item is included in nep-cmp, nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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