Optimal Stabilization in an Emission Permits Market

54 Pages Posted: 17 May 2018

See all articles by Reyer Gerlagh

Reyer Gerlagh

Tilburg University - Tilburg University School of Economics and Management

Roweno J.R.K. Wan

Tilburg University

Date Written: March 21, 2018

Abstract

We develop a 2-period emission trading model for a stock pollutant with demand shocks resolving over time. We find precise conditions for efficiency of a stabilization mechanism where cumulative available permits decrease with excess supply in early periods. Our model describes the stabilization rule, and identifies optimal parameters. The market stability mechanism substantially increases welfare, increases the domain of parameter values where (Stabilized) Banking outperforms Prices, and reduces price volatility. Our findings are important for emission trading schemes worldwide, such as California's Global Warming Solutions Act Scoping Plan, the U.S. Regional Greenhouse Gas Initiative, EU-ETS, and China's National ETS, the world’s largest carbon market.

Keywords: prices, quantities, emission trading, regulatory instruments, pollution, climate change

JEL Classification: H230, Q540, Q580

Suggested Citation

Gerlagh, Reyer and Wan, Roweno J.R.K., Optimal Stabilization in an Emission Permits Market (March 21, 2018). CESifo Working Paper Series No. 6950. Available at SSRN: https://ssrn.com/abstract=3179932

Reyer Gerlagh (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Roweno J.R.K. Wan

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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