Curbing Price Fluctuations in Cap-and-Trade Auctions
36 Pages Posted: 11 Oct 2022
There are 2 versions of this paper
Curbing Price Fluctuations in Cap-and-Trade Auctions
Curbing Price Fluctuations in Cap-and-Trade Auctions
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: Suggested Citation