Curbing Price Fluctuations in Cap-and-Trade Auctions

36 Pages Posted: 11 Oct 2022

See all articles by Thomas D. Jeitschko

Thomas D. Jeitschko

Michigan State University - Department of Economics

Pallavi Pal

Stevens Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: 2022

Abstract

In recent years, a significant problem with the carbon credit market has been 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

JEL Classification: D430, L110, L420

Suggested Citation

Jeitschko, Thomas D. and Pal, Pallavi, Curbing Price Fluctuations in Cap-and-Trade Auctions (2022). CESifo Working Paper No. 9978, Available at SSRN: https://ssrn.com/abstract=4241618 or http://dx.doi.org/10.2139/ssrn.4241618

Thomas D. Jeitschko

Michigan State University - Department of Economics ( email )

110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~jeitschk/

Pallavi Pal (Contact Author)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

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