Price volatility and risk exposure: on the interaction of quota and product markets

Fridrik Baldursson () and Nils-Henrik von der Fehr

MPRA Paper from University Library of Munich, Germany

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 D9 H23 L51 Q28 Q38 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-bec, nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/14994/1/MPRA_paper_14994.pdf original version (application/pdf)

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:14994

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().