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

Jinhua Zhao

No 18342, Hebrew University of Jerusalem Archive from Hebrew University of Jerusalem

Abstract: 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.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Pages: 40
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:ags:hebarc:18342

DOI: 10.22004/ag.econ.18342

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