Bankable emission permits under uncertainty and optimal risk-management rules
Chevallier, Julien; Etner, Johanna; Jouvet, Pierre-André (2011), Bankable emission permits under uncertainty and optimal risk-management rules, Research in Economics, 65, 4, p. 332-339. http://dx.doi.org/10.1016/j.rie.2011.01.004
TypeArticle accepté pour publication ou publié
Journal nameResearch in Economics
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Abstract (EN)This article proposes a theory of banking of emission permits under conditions of regulatory uncertainty. Based on a two-period partial equilibrium framework, we examine the effects of increasing risk - in the sense of a mean-preserving spread - regarding a future permits allocation at the firm-level. We also examine the role of an agency to pool risks by re-allocating permits for a group of firms. Our results are twofold. First, an increase in risk may lead to changes in a firm’s banking strategy, depending on the third partial derivative of its production function with respect to pollution. Second, we define an optimal risk-sharing rule between agents to respond to political decision changes. Our results overall suggest that the bankability of permits may be used as a risk-management tool.
Subjects / KeywordsBanking; Emission permits; Policy risk; Uncertainty
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