The Analysis of the EU-ETS Carbon Allowance Cap Setting Method

摘要

One of the most important works of establishing a carbon trading market is to set the allowance cap. For a long time, no matter in Europe or China, most of experts and professionals have believed the cap of allowance to be fixed. The reason seemed clear enough: Fixed cap can guarantee stable anticipated supply in carbon market, which is the basis of market equilibrium, the necessary condition for enterprises to make consistent decisions, and is beneficial for building up allowance pricing mechanism based on marginal carbon emission reduction cost; therefore it can ensure the effectiveness of carbon market. However, this theoretical assumption deviates from practical result, leading to an antinomy. The theoretical assumption is that fixed cap as the basis of the orderliness of carbon market. The fact is that EU ETS, as a carbon market strictly implementing cap of allowance, not only has violent price fluctuations, but also needs to adjust its cap periodically, which results in another round of disorderly violent fluctuation of allowance price. This paper endeavors to find out the reasons for the paradox by analyzing the theoretical logic of EU-ETS adopting fixed cap.