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Emissions trading systems with cap adjustments

Kollenberg, Sascha and Taschini, Luca ORCID: 0000-0001-5355-1736 (2016) Emissions trading systems with cap adjustments. Journal of Environmental Economics and Management, 80. pp. 20-36. ISSN 0095-0696

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Identification Number: 10.1016/j.jeem.2016.09.003


Emissions Trading Systems (ETSs) with fixed caps lack provisions to address systematic imbalances in the supply and demand of permits due to changes in the state of the regulated economy. We propose a mechanism which adjusts the allocation of permits based on the current bank of permits. The mechanism spans the spectrum between a pure quantity instrument and a pure price instrument. We solve the firms' emissions control problem and obtain an explicit dependency between the key policy stringency parameter – the adjustment rate – and the firms' abatement and trading strategies. We present an analytical tool for selecting the optimal adjustment rate under both risk-neutrality and risk-aversion, which provides an analytical basis for the regulator's choice of a responsive ETS policy.

Item Type: Article
Official URL:
Additional Information: © 2016 The Authors
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HG Finance
J Political Science > JN Political institutions (Europe)
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy
Date Deposited: 19 Sep 2016 09:15
Last Modified: 16 May 2024 02:19
Projects: ES/K006576/1, 308481, 01LA1115A
Funders: Economic and Social Research Council, Seventh Framework Programme, German Federal Ministry of Education and Research

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