Curbing Price Fluctuations in Cap-and-Trade Auctions

Arbeitspapier

In recent years, a significant problem with the carbon credit market has been higher than initially predicted price volatility. It is essential to study the market in a repeated-period dynamic setting to identify the factors enabling high fluctuations in prices. In this paper, we examine the dynamic auction design and propose a method to curb price volatility through a flexible supply cap. The equilibrium analysis shows that modifying the cap on per period supply can decrease price fluctuations. Currently, the government or the auctioneer sets a per-period limit on the supply, which reduces at a fixed rate over time. However, this paper suggests that a flexible cap on the per-period supply would be a better alternative. Specifically, we show that correlating the supply rate with expected future demand results in a more stable price.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9978

Classification and Topics

• Classification: Wirtschaft ; Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection ; Production, Pricing, and Market Structure; Size Distribution of Firms ; Vertical Restraints; Resale Price Maintenance; Quantity Discounts
• Subject: dynamic mechanism design ; auctions ; emissions permits ; environmental regulation ; climate change

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Jeitschko, Thomas D. ; Pal, Pallavi
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/266013
• Last update: 10.03.2025, 11:45 AM CET