Abstract

Cap and trade schemes often use a policy of adjustable allowance supply with the intention to stabilize the market for allowances. We investigate whether these policies deliver with a focus on allowance prices. Motivated by existing policies, we study schemes that rely on either the allowance price (price measures) or the surplus of unused allowances (quantity measures) to adjust supply in a dynamic cap and trade market. Compared to emissions trading under a fixed cap, we find that price measures stabilize allowance prices. Quantity measures can be destabilizing. Though phrased in the context of changing interest rates, our results warn more generally against the belief that quantity measures are a suitable instrument to promote a stable cap and trade market.

Keywords

Emissions trading; Climate change; Interest rate; Market-based emissions regulation; Policy design

Published in

Journal of Environmental Economics and Management
2023, Volume: 118, article number: 102793

SLU Authors

• Heijmans, Roweno

  • Department of Economics, Swedish University of Agricultural Sciences
    

UKÄ Subject classification

Economics
Social Sciences Interdisciplinary


Publication identifier

DOI: https://doi.org/10.1016/j.jeem.2023.102793

Permanent link to this page (URI)

https://res.slu.se/id/publ/121302