Flexibility premium of emissions permits

Luca Taschini

Journal of Economic Dynamics and Control, 2021, vol. 126, issue C

Abstract: Investments in abatement technology are often characterised by irreversibility and significant implementation lags, whereas emissions permits can be traded at any time. As such, abatement and emissions permit trading systems are hardly perfect substitutes. We formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment/divestment lags and irreversibility in relation to the price of emissions permits. Using option pricing concepts, we reformulate the technology adoption problem in terms of the technology’s characteristics (irreversibility and implementation lags) and offer a conceptual quantification of the flexibility premium of emissions permits.

Keywords: Carbon markets; Climate change; Cap-and-trade; Implementation delay; Irreversible investment (search for similar items in EconPapers)
JEL-codes: C61 D81 G13 Q50 Q52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:126:y:2021:i:c:s0165188920301810

DOI: 10.1016/j.jedc.2020.104013

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