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

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.