Optimal Stabilization in an Emission Permits Market

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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

Keywords

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

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