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Emissions trading systems with cap adjustments |
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| Institution: | 1. University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany;2. The Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK;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 |
| 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. |
| Keywords: | EU ETS reform Dynamic allocation Policy design Responsiveness Resilience Supply management mechanism Risk-aversion |
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