Price Volatility and Risk Exposure: on the Interaction of Quota and Product Markets

Fridrik Baldursson () and Nils-Henrik von der Fehr

No 11/2009, Memorandum from Oslo University, Department of Economics

Abstract: We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is - whether it is ‘clean’ or ‘dirty’- and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, the optimal initial quota allocation turns out to resemble a grandfathering regime: clean firms are allocated no quotas - dirty firms are allocated quotas for a part of their emissions.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour.

Keywords: regulation; effluent taxes; tradable quotas; uncertainty; risk aversion; environmental management (search for similar items in EconPapers)
JEL-codes: D81 H23 L51 Q28 Q38 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2009-04-22
New Economics Papers: this item is included in nep-bec, nep-ene, nep-env, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets (2012)
Working Paper: Price volatility and risk exposure: on the interaction of quota and product markets (2009)
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