Circuit Breaker (Price Band)

A circuit breaker (also called a price collar or price band) is a rule that prevents any single trade from being executed at a price that deviates too far from the most recent transaction price. In PromETS, the band is expressed as a percentage: a 20% band means no order can match more than 20% above or below the last trade price.

Why ETS markets use them

Carbon markets can be thin and volatile, especially in early periods before liquidity builds. Without a band, a single aggressive order can move the clearing price dramatically, triggering panic buying or selling by other participants. A circuit breaker gives the market time to re-equilibrate, which is particularly valuable in classroom settings where participants are still learning price discovery.

Why some prefer to disable them

In a well-functioning market, prices should be free to find their equilibrium quickly. A tight band can prevent legitimate price corrections, for example, after new compliance data is announced. Researchers studying efficient price discovery often disable the band entirely (set to 0) so that order flow alone determines price.

Real-world precedent

The EU ETS does not use a hard circuit breaker. Instead, it relies on the Market Stability Reserve (MSR), which adjusts the supply of allowances over time to dampen structural price swings without imposing a per-trade collar. India's nascent CCTS rules have not yet specified a circuit breaker mechanism.