{"id":76923,"date":"2025-02-05T10:27:00","date_gmt":"2025-02-05T10:27:00","guid":{"rendered":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=publication&p=76923"},"modified":"2025-02-05T10:27:00","modified_gmt":"2025-02-05T10:27:00","slug":"weitzman-meets-taylor-eu-allowance-price-drivers-and-carbon-cap-rules","status":"publish","type":"publication","link":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/weitzman-meets-taylor-eu-allowance-price-drivers-and-carbon-cap-rules\/","title":{"rendered":"Weitzman meets Taylor: EU allowance price drivers and carbon cap rules"},"content":{"rendered":"\n

Cap-and-trade systems are the primary market-based approach for regulating greenhouse gas emissions, but significant shortcomings have been exposed in recent years, particularly in terms of high permit price volatility. Adjusting the cap to respond to shocks based on available information could help, but the selection of factors that should guide these adjustments remains unclear.<\/p>\n\n\n\n

This paper addresses this issue by developing a model to identify the most influential drivers of carbon permit prices within the EU Emissions Trading System (ETS) and proposes a novel approach to estimating less-observable shocks. The authors quantify the contribution of each factor to carbon price variability. They propose a rule-based cap adjustment mechanism that dynamically responds to deviations in emissions and abatement costs, reduces volatility by 55% compared with the current EU ETS cap, and cuts welfare losses in consumption equivalence terms by 40%.<\/p>\n\n\n\n

Key points for decision-makers<\/h2>\n\n\n\n