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Curbing Price Fluctuations in Cap-and-Trade Auctions

Thomas D. Jeitschko and Pallavi Pal

No 9266, CESifo Working Paper Series from CESifo

Abstract: In recent years, a significant problem with the carbon credit market has been the higher than initially predicted price volatility. It is essential to study the market in a repeated-period dynamic setting to identify the factors enabling high fluctuations in prices. In this paper, we examine the dynamic auction design and propose a method to curb price volatility through a flexible supply cap. The equilibrium analysis shows that modifying the cap on per period supply can decrease price fluctuations. Currently, the government or the auctioneer sets a per-period limit on the supply, which reduces at a fixed rate over time. However, this paper suggests that a flexible cap on the per-period supply would be a better alternative. Specifically, we show that correlating the supply rate with expected future demand results in a more stable price.

Keywords: dynamic mechanism design; auctions; emissions permits; environmental regulation; climate change (search for similar items in EconPapers)
JEL-codes: D43 L11 L42 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-des, nep-ene, nep-env, nep-gth and nep-isf
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9266

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