Sensitivity Analysis of emissions Markets: A Discrete-Time Radner Equilibrium Approach

TL;DR

This paper analyzes how regulatory, economic, and technological factors influence emissions market outcomes using a Radner equilibrium model, providing insights for policymakers to improve emissions trading system design.

Contribution

It introduces a discrete-time Radner equilibrium framework to study the impact of policy and market uncertainties on emissions allowance prices and firm behavior.

Findings

Allowance prices are highly sensitive to regulatory standards.

Firms' abatement efforts vary significantly with technological availability.

Market efficiency can be improved by understanding stakeholder responses.

Abstract

Emissions markets play a vital role in emissions reduction by incentivizing firms to minimize costs. However, their effectiveness heavily depends on the decisions of policymakers, future economic activity, and the availability of abatement technologies. This study investigates how variations in regulatory standards, firms' abatement costs, and emission levels influence allowance prices and firms' abatement efforts. This is done in a Radner equilibrium framework that incorporates intertemporal decision-making and uncertainty, enabling a comprehensive analysis of market dynamics and outcomes. The findings provide valuable insights for policymakers aiming to enhance the design and efficiency of emissions trading systems through a deeper understanding of stakeholder responses across varying market conditions.