Stochastic Dynamic Cap and Trade system. A greenhouse gas emission regulation under uncertainty

In the face of mounting environmental concerns, reducing greenhouse gas emissions has emerged as a significant worldwide priority. This paper addresses the key question of which strategy for reducing greenhouse gas emissions is the most cost-effective. Two prominent carbon control tools, cap and trade and carbon taxes, have garnered significant attention in this context. However, recent experiences with cap and trade systems, such as the European Union Emissions Trading System (EU ETS), have raised concerns about price volatility and policy effectiveness, particularly in the face of economic shocks. To address these challenges, this paper proposes a Dynamic Supply Mechanism (DSM), inspired by regulatory approaches in California and South Korea. The DSM aims to strike a balance between quantity-based and price-based strategies, adapting permit allocation in response to unexpected events and maintaining regulatory goals. The paper presents a numerical example comparing the DSM with existing policies in hypothetical carbon emissions markets. The paper demonstrates that the DSM can achieve emission reduction targets efficiently, outperforming static policies like the EU ETS or carbon taxes in the face of uncertainty. The proposed DSM offers a promising approach to tackle emissions reduction. As climate change continues to be a pressing global issue, innovative regulatory mechanisms like the DSM are crucial for mitigating its