Price and Quantity “Collars” for Stabilizing Emissions Allowance Prices: An Experimental Analysis of the EU ETS Market Stability Reserve

Charles Holt and William Shobe

RFF Working Paper Series from Resources for the Future

Abstract: This paper reports the results of a laboratory experiment with financially motivated participants that is used to compare alternative proposals for managing the time path of emissions allowance prices in the face of random firm-specific and market-level structural shocks. In this setting, market performance measures such as social surplus are enhanced by the use of a price collar (auction reserve price and soft price cap). Comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances. In fact, in some specifications, the quantity collar performed worse than no stabilization policy at all. The experiment implemented a specific set of structural elements, and extrapolation to other settings should be done with caution. Nevertheless, an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important (although perhaps not exclusive) role to play in constructing an effective market stability reserve policy.

Keywords: EU Emissions Trading System; market stability reserve; price collar; allowance prices; emissions allowances (search for similar items in EconPapers)
Date: 2015-06-25
New Economics Papers: this item is included in nep-ene, nep-env and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Reprint of: Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve (2016)
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