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Optimal Stabilization in an Emission Permits Market

Author

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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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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6950.pdf
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    References listed on IDEAS

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    1. Matti Liski & Juan‐Pablo Montero, 2011. "Market Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits," Economic Journal, Royal Economic Society, vol. 121(551), pages 116-144, March.
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    Cited by:

    1. Sangha, Kamaljit K. & Gerritsen, Rolf & Russell-Smith, Jeremy, 2019. "Repurposing government expenditure for enhancing Indigenous well-being in Australia: A scenario analysis for a new paradigm," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 75-91.
    2. Brown, Patrick R. & O’Sullivan, Francis M., 2019. "Shaping photovoltaic array output to align with changing wholesale electricity price profiles," Applied Energy, Elsevier, vol. 256(C).
    3. Chen, Yihsu & Zhang, Duan & Takashima, Ryuta, 2019. "Carbon emission forensic in the energy sector: Is it worth the effort?," Energy Policy, Elsevier, vol. 128(C), pages 868-878.
    4. Mitridati, Lesia & Kazempour, Jalal & Pinson, Pierre, 2020. "Heat and electricity market coordination: A scalable complementarity approach," European Journal of Operational Research, Elsevier, vol. 283(3), pages 1107-1123.
    5. González-Garrido, A. & Gaztañaga, H. & Saez-de-Ibarra, A. & Milo, A. & Eguia, P., 2020. "Electricity and reserve market bidding strategy including sizing evaluation and a novel renewable complementarity-based centralized control for storage lifetime enhancement," Applied Energy, Elsevier, vol. 262(C).

    More about this item

    Keywords

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

    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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