Comparing policies to confront permit over-allocation |
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| Institution: | 1. University of Oxford (Smith School of Enterprise and the Environment; Institute for New Economic Thinking at the Oxford Martin School); ESRC Centre for Climate Change Economics and Policy at the Grantham Research Institute on Climate Change and the Environment, LSE;2. Technical University Berlin;3. Adelphi;4. Resources for the Future;5. Australian National University;1. Department of Economics, University of Strathclyde, Glasgow G4 0QU, UK;2. School of Economics, University of Queensland, Brisbane 4072, Australia;1. School of Management, University of Science and Technology of China, Hefei, China;2. Center for Energy & Environmental Policy Research, Beijing Institute of Technology, Beijing, China;3. School of Management and Economics, Beijing Institute of Technology, Beijing, China;4. Sustainable Development Research Institute for Economy and Society of Beijing, Beijing, China;1. FiME (Finance for Energy Market Research Centre), France and CABREE (Centre for Applied Business Research in Energy and the Environment), Canada;2. LEDA-CGEMP, Université Paris Dauphine and Ecole Polytechnique, France;3. EDF R&D, France;1. Department of Economics and Finance, Valdosta State University, Valdosta, GA 31698, United States;2. Department of Economics and Howard H. Baker Jr. Center for Public Policy, 916 Volunteer Blvd, 523 Stokely Management Center, University of Tennessee, Knoxville, TN 37996, United States;1. Department of Resource Economics, University of Massachusetts, Amherst, USA;2. Institute of State Economy, Nankai University, Tianjin, China;3. Department of Economics, University of Alaska, Anchorage, USA |
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| Abstract: | Instability in cap-and-trade markets, particularly with respect to permit price collapses, has been an area of concern for regulators. To that end, several policies, including hybrid price-quantity mechanisms and the newly introduced “market stability reserve” (MSR) systems, have been introduced and even implemented in some cases. I develop a stochastic dynamic model of a cap-and-trade system, parameterized to values relevant to the European Union׳s Emission Trading System (EU ETS) to analyze the performance of these policies aimed at adding stability to the system or at least at reducing perceived over-allocations of permits. Results suggest that adaptive-allocation mechanisms such as a price collar or MSR can reduce permit over-allocations and permit price volatility in a more cost-effective manner than simply reducing scheduled permit allocations. However, it is also found that the performance of these adaptive allocation policies, and in particular the MSR, are greatly affected by assumed discount rates and policy parameters. |
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| Keywords: | Cap-and-trade Market stability reserve Price collar EU ETS |
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