Type of Publication: Article in Journal

Emissions trading systems with cap adjustments

Author(s):

Kollenberg, S.; Taschini, L.

Title of Journal:

Journal of Environmental Economics and Management

Publication Date:

2016

Keywords:

EU ETS reform; Dynamic allocation; Policy design; Responsiveness; Resilience; Supply management mechanism; Risk-Aversion

Digital Object Identifier (DOI):

doi:10.1016/j.jeem.2016.09.003

Citation:

Download BibTeX

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.