Emissions Trading Systems with Cap Adjustments

27 Pages Posted: 25 May 2015 Last revised: 21 Jan 2017

See all articles by Sascha Kollenberg

Sascha Kollenberg

University of Duisburg-Essen

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 20, 2017

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 Mechanism, Risk-Aversion

JEL Classification: H23, E63, Q52, Q58

Suggested Citation

Kollenberg, Sascha and Taschini, Luca, Emissions Trading Systems with Cap Adjustments (January 20, 2017). Available at SSRN: https://ssrn.com/abstract=2610213 or http://dx.doi.org/10.2139/ssrn.2610213

Sascha Kollenberg (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstraße 12
Essen, 45141
Germany

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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