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

Jinhua Zhao

Center for Agricultural and Rural Development (CARD) Publications from Center for Agricultural and Rural Development (CARD) at Iowa State University

Abstract: A major concern with tradable emission permits (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 efficient permit trading, the price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. The authors 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-versus-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.

Date: 2000-08
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Related works:
Journal Article: Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges (2003)
Working Paper: Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits and Emissions Charges (2003)
Working Paper: IRREVERSIBLE ABATEMENT INVESTMENT UNDER COST UNCERTAINTIES: TRADABLE EMISSION PERMITS AND EMISSIONS CHARGES (2000)
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