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Carbon price interaction between allocated permits and generated offsets

Author

Listed:
  • Jongmin Yu

    (Hongik University)

  • Mindy L. Mallory

    (University of Illinois at Urbana-Champaign)

Abstract

The Kyoto Protocol established targets for curbing greenhouse gas emissions in order to mitigate climate change, and it introduced two kinds of market-based mechanisms: the emission allowance market and the carbon offset market. We identify stylized features of the two mechanisms with a partial equilibrium model. Our work is the first to derive a closed form solution incorporating most policy instruments, such as abatement and offset usage, and delivery risks in offsets. We show that policy changes will impact one market directly and the other indirectly, generating unequal price responses that affects the spread between the two compliance instruments. We show how the price spread between allowances and offsets is affected by market conditions such as the offset import limit, abatement and offset cost, penalty rate, emission cap, and baseline emissions.

Suggested Citation

  • Jongmin Yu & Mindy L. Mallory, 2020. "Carbon price interaction between allocated permits and generated offsets," Operational Research, Springer, vol. 20(2), pages 671-700, June.
    • Handle: RePEc:spr:operea:v:20:y:2020:i:2:d:10.1007_s12351-017-0345-2
    DOI: 10.1007/s12351-017-0345-2
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    References listed on IDEAS

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    Cited by:

    1. Linghu, Dazhi & Wu, Xilin & Lai, Kee-Hung & Ye, Fei & Kumar, Ajay & Tan, Kim Hua, 2022. "Implementation strategy and emission reduction effectiveness of carbon cap-and-trade in heterogeneous enterprises," International Journal of Production Economics, Elsevier, vol. 248(C).

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    More about this item

    Keywords

    Carbon price spread; Emissions compliance market; Carbon offset market; Environmental regulation; Cap-and-trade;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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