Investment Effect of Emission Permits Banking under Technological Uncertainty

Lars Olson and Hojeong Park

No 677, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: This paper analyzes investment effect of tradable permit program (TPP) when emission permits are bankable and there is technological uncertainty regarding abatement cost. In the absence of uncertainty, a firm's incentive to environmental investment decreases under a bankable TPP compared to a non-bankable TPP because the firm can use banked permits for future abatement compliance. However, when cost uncertainty is prevalent, there arises a real option value of environmental investment that may change a firm's investment strategy. The condition is derived under which a bankable TPP provides higher investment incentive than a non-bankable TPP.

Keywords: real option; uncertainty; bankable tradable emission permits (search for similar items in EconPapers)
JEL-codes: C61 Q55 (search for similar items in EconPapers)
Date: 2004-08-11
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:feam04:677

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