Optimal Stabilization in an Emission Permits Market

Research output: Working paperDiscussion paperOther research output

Abstract

We develop a 2-period emission trading model for a stock pollutant with demand shocks resolving over time. We find precise conditions for efficiency of a stabilization mechanism where cumulative available permits decrease with excess supply in early periods. Our model describes the stabilization rule, and identifies optimal parameters. The market stability mechanism substantially increases welfare, increases the domain of parameter values where (Stabilized) Banking outperforms Prices, and reduces price volatility. Our findings are important for emission trading schemes worldwide, such as California's Global Warming Solutions Act Scoping Plan, the U.S. Regional Greenhouse Gas Initiative, EU-ETS, and China's National ETS, the world’s largest carbon market.
Original languageEnglish
Place of PublicationMunich
PublisherCESifo Working Papers
Number of pages54
Volume6950
Publication statusPublished - 2018

Publication series

NameCESifo
Volume6950

Fingerprint

Emission permits
Stabilization
Demand shocks
Carbon markets
Emissions trading scheme
China
Emissions trading
Greenhouse gases
Global warming
Banking
Price volatility
Stock pollutant

Keywords

  • prices
  • quantities
  • emission trading
  • regulatory instruments
  • pollution
  • climate change

Cite this

Gerlagh, R., & Heijmans, R. J. R. K. (2018). Optimal Stabilization in an Emission Permits Market. (CESifo; Vol. 6950). Munich: CESifo Working Papers.
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Gerlagh, R & Heijmans, RJRK 2018 'Optimal Stabilization in an Emission Permits Market' CESifo, vol. 6950, CESifo Working Papers, Munich.

Optimal Stabilization in an Emission Permits Market. / Gerlagh, Reyer; Heijmans, Roweno J.R.K.

Munich : CESifo Working Papers, 2018. (CESifo; Vol. 6950).

Research output: Working paperDiscussion paperOther research output

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T1 - Optimal Stabilization in an Emission Permits Market

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AU - Heijmans, Roweno J.R.K.

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N2 - We develop a 2-period emission trading model for a stock pollutant with demand shocks resolving over time. We find precise conditions for efficiency of a stabilization mechanism where cumulative available permits decrease with excess supply in early periods. Our model describes the stabilization rule, and identifies optimal parameters. The market stability mechanism substantially increases welfare, increases the domain of parameter values where (Stabilized) Banking outperforms Prices, and reduces price volatility. Our findings are important for emission trading schemes worldwide, such as California's Global Warming Solutions Act Scoping Plan, the U.S. Regional Greenhouse Gas Initiative, EU-ETS, and China's National ETS, the world’s largest carbon market.

AB - We develop a 2-period emission trading model for a stock pollutant with demand shocks resolving over time. We find precise conditions for efficiency of a stabilization mechanism where cumulative available permits decrease with excess supply in early periods. Our model describes the stabilization rule, and identifies optimal parameters. The market stability mechanism substantially increases welfare, increases the domain of parameter values where (Stabilized) Banking outperforms Prices, and reduces price volatility. Our findings are important for emission trading schemes worldwide, such as California's Global Warming Solutions Act Scoping Plan, the U.S. Regional Greenhouse Gas Initiative, EU-ETS, and China's National ETS, the world’s largest carbon market.

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KW - quantities

KW - emission trading

KW - regulatory instruments

KW - pollution

KW - climate change

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VL - 6950

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Gerlagh R, Heijmans RJRK. Optimal Stabilization in an Emission Permits Market. Munich: CESifo Working Papers. 2018. (CESifo).