Environmental markets for tradable certificates come in several categories, including both carbon emissions allowances and green (renewable energy) certificates. In both cases, a variety of market designs and structures exist, with rules sometimes even changing frequently within a given market. Relatedly, several fundamental weaknesses of environmental markets have been witnessed through history, including sudden price swings and extended periods of over- or undersupply, eroding market confidence. Such price behavior and regulatory uncertainty illustrates the need to investigate alternative design ideas and their likely impact on market dynamics. In this talk, we introduce several policy proposals which have been adapted to and tested on the New Jersey solar renewable energy certificate (SREC) market, together with a stochastic structural model for prices and solar generation. In particular we discuss the use of a sloped compliance penalty function instead of a traditional `cliff' or binary function, together with a dynamic and adaptive mechanism for setting future requirement levels as a function of previous surpluses or shortages. We analyze the optimal decisions of market participants facing SREC submission and banking decisions, and compare the resulting implications for prices. Finally, we discuss briefly some related recent work on the design of a new global carbon market, which also embeds the crucial feature of responding to unexpected shocks via adaptive emissions reduction targets, this time with an additional focus on an equitable and transparent distribution of responsibilities across countries.
Copyright. All Rights Reserved.