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Emissions trading systems with cap adjustments

Sascha Kollenberg and Luca Taschini ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Emissions Trading Systems (ETSs) with fixed caps lack provisions to address systematic imbalances in the supply and demand of permits due to changes in the state of the regulated economy. We propose a mechanism which adjusts the allocation of permits based on the current bank of permits. The mechanism spans the spectrum between a pure quantity instrument and a pure price instrument. We solve the firms' emissions control problem and obtain an explicit dependency between the key policy stringency parameter – the adjustment rate – and the firms' abatement and trading strategies. We present an analytical tool for selecting the optimal adjustment rate under both risk-neutrality and risk-aversion, which provides an analytical basis for the regulator's choice of a responsive ETS policy.

Keywords: EU ETS reform; dynamic allocation; policy design; responsiveness; resilience; supply management (search for similar items in EconPapers)
JEL-codes: E63 H23 Q52 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Date: 2016-11
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Published in Journal of Environmental Economics and Management, November, 2016, 80, pp. 20-36. ISSN: 0095-0696

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Journal Article: Emissions trading systems with cap adjustments (2016) Downloads
Working Paper: Emissions trading systems with cap adjustments (2016) Downloads
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