Using Output-Based Allocations to Manage Volatility and Leakage in Pollution Markets

21 Pages Posted: 2 Mar 2017

See all articles by Guy Meunier

Guy Meunier

Ecole Polytechnique, Palaiseau

Juan-Pablo Montero

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR); Pontifical Catholic University of Chile - Institute of Economics

Jean Pierre Ponssard

Ecole Polytechnique, Paris - Laboratoire d'Econometrie

Date Written: February 14, 2017

Abstract

Output-based allocations (OBAs) are typically used in emission trading schemes to mitigate leakage in sectors at risk. Recent work has shown they may also help to stabilize prices in markets subject to supply and demand shocks. We extend previous work to simultaneously include both leakage and volatility. Motivated by discussions on how to reform carbon markets around the world, and in Europe in particular, we use our model to revisit several critical issues in the design of these markets. In particular, we look at how different OBA schemes manage permit price uctuations and what are the implications of deducting OBA permits (the majority going to trade-exposed and carbon intensive sectors) from the overall permit allocation, so as to keep the global cap on emissions fixed (as it is the case in California and in the EU).

Keywords: pollution markets, carbon price volatility, output-based allocations

JEL Classification: D240, L130, H230, L740

Suggested Citation

Meunier, Guy and Montero, Juan-Pablo and Ponssard, Jean Pierre, Using Output-Based Allocations to Manage Volatility and Leakage in Pollution Markets (February 14, 2017). CESifo Working Paper Series No. 6334, Available at SSRN: https://ssrn.com/abstract=2925763

Guy Meunier

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

Juan-Pablo Montero

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR) ( email )

One Amherst Street, E40-279
Cambridge, MA 02142
United States
+56 2 686 4322 (Phone)
+56 2 686 6472 (Fax)

HOME PAGE: http://www.mit.edu/people/jpmonter

Pontifical Catholic University of Chile - Institute of Economics ( email )

Vicuna Mackenna 4860
Santiago
Chile
+56 2 686 4322 (Phone)
+56 2 686 6472 (Fax)

HOME PAGE: http://www.mit.edu/people/jpmonter

Jean Pierre Ponssard (Contact Author)

Ecole Polytechnique, Paris - Laboratoire d'Econometrie ( email )

1 rue Descartes
Paris, 75005
France

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