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Bankable emission permits under uncertainty and optimal risk-management rules

Julien Chevallier, Johanna Etner and Pierre-André Jouvet

Research in Economics, 2011, vol. 65, issue 4, 332-339

Abstract: 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 permit 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.

Keywords: Emission; permits; Banking; Uncertainty; Policy; risk (search for similar items in EconPapers)
Date: 2011
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