Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits and Emissions Charges

A major concern with TEPs is that stochastic permit prices may reduce firm incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge. However, under effcient permit trading, the price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. We develop a rational expectations general equilibrium model of permit trading to show how cost uncertainty affects investment. Differences between the two policies can be decomposed into a general equilibrium effect and a price-vs-quantity effect. Except for the curvature of the payoff functions, uncertainties reduce both effects so that tradable permits in fact help maintain firms' investment incentive under uncertainty.


Issue Date:
2000
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/18342
Total Pages:
40
JEL Codes:
Q20
Series Statement:
CARD Working Paper 00-WP 252




 Record created 2017-04-01, last modified 2017-08-24

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