Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266013 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9978
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
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.
Subjects: 
dynamic mechanism design
auctions
emissions permits
environmental regulation
climate change
JEL: 
D43
L11
L42
Document Type: 
Working Paper
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