Risk Aversion in Modeling of Cap-and-Trade Mechanisms and Optimal Design of Emission Markets

Paolo Falbo, Juri Hinz and Cristian Pelizzari
Additional contact information
Paolo Falbo: Department of Economics and Management, University of Brescia
Juri Hinz: School of Mathematical Sciences, UTS Business School, University of Technology Sydney
Cristian Pelizzari: Department of Economics and Management, University of Brescia

No 359, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: According to theoretical arguments, a properly designed emission trading system should help reaching pollution reduction at low social burden. Based on the theoretical work of environmental economists, cap-and-trade systems are put into operations all over the world. However, the practice from emissions trading yields a real stress test for the underlying theory and reveals a number of its weak points. This paper aims to fill the gap between general welfare concepts underlying understanding of liberalized market and specific issues of real-world emission market operation. In our work, we present a novel technique to analyze emission market equilibrium in order to address diverse questions in the setting of risk-averse market players. Our contribution significantly upgrades all existing models in this field, which neglect risk-aversion aspects at the cost of having a wide range of singularities in their conclusions, now resolved in our approach. Furthermore, we show how the architecture of an environmental market can be optimized under the realistic assumption of risk-aversion and which approximations must be met therefore.

Keywords: emission trading; environmental finance; , market equilibrium (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015-04-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-upt
References: Add references at CitEc
Citations:

Published as: Falbo, P. and Hinz, J., 2016, "Risk Aversion in Modeling of Cap-and-Trade Mechanisms and Optimal Design of Emission Markets", In: Benth, F. and Di Nunno, G. (eds) Stochastics of Environmental and Financial Economics, Springer Proceedings in Mathematics and Statistics, vol 138, Springer, 265-284.

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp359.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:359

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford (duncan.ford@uts.edu.au).