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Optimal Stabilization in an Emission Permits Market

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  • Reyer Gerlagh
  • Roweno J.R.K. Wan

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.

Suggested Citation

  • Reyer Gerlagh & Roweno J.R.K. Wan, 2018. "Optimal Stabilization in an Emission Permits Market," CESifo Working Paper Series 6950, CESifo.
    • Handle: RePEc:ces:ceswps:_6950
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    References listed on IDEAS

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    More about this item

    Keywords

    prices; quantities; emission trading; regulatory instruments; pollution; climate change;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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