Emissions trading systems with cap adjustments

Sascha Kollenberg, Luca Taschini*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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.

Original languageEnglish
Pages (from-to)20-36
Number of pages17
JournalJournal of Environmental Economics and Management
Early online date15 Sept 2016
Publication statusPublished - 1 Nov 2016

Keywords / Materials (for Non-textual outputs)

  • dynamic allocation
  • EU ETS reform
  • policy design
  • resilience
  • responsiveness
  • risk-aversion
  • supply management mechanism


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