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Policy Uncertainty and Investment in Low-Carbon Technology

Silvia Albrizio () and Hélia Costa ()

No ECO2012/27, Economics Working Papers from European University Institute

Abstract: In the context of an emission trading scheme (ETS), we study how uncertainty over the environmental policy affectsfirms' investment in low-carbon technologies. We develop a three period sequential model that combines the industry and the electricity sectors and encompasses both irreversible and reversible investment possibilities for the firms. Additionally, we explicitly model the policy uncertainty in the regulator's objective function as well as the market interactions that give rise to an endogenous price of permits. We find that uncertainty reduces irreversible investment and that the availability of both reversible and irreversible technologies partially eliminates the positive effect of policy uncertainty on reversible technology found in previous literature. Furthermore, we provide a framework that allows to assess the efficiency of different implementations of the scheme.

Keywords: Emission Trading Scheme; low-carbon investment; policy uncertainty; mechanism design; irreversible and reversible investment (search for similar items in EconPapers)
JEL-codes: D78 D80 L51 Q58 (search for similar items in EconPapers)
Date: 2012
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