Bankable emission permits under uncertainty and optimal risk-management rules |
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Authors: | Julien Chevallier Johanna Etner Pierre-André Jouvet |
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Institution: | aCGEMP-LEDa, University Paris Dauphine, France;bCERSES, University Paris Descartes, France;cEconomiX, University of Paris Ouest and Climate Economics Chair, France |
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Abstract: | This article proposes a theory of banking of emission permits under conditions of regulatory uncertainty. Based on a two-period partial equilibrium framework, we examine the effects of increasing risk–in the sense of a mean preserving spread–regarding a future permit allocation at the firm level. We also examine the role of an agency to pool risks by re-allocating permits for a group of firms. Our results are twofold. First, an increase in risk may lead to changes in a firm’s banking strategy, depending on the third partial derivative of its production function with respect to pollution. Second, we define an optimal risk-sharing rule between agents to respond to political decision changes. Our results overall suggest that the bankability of permits may be used as a risk-management tool. |
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Keywords: | Emission permits Banking Uncertainty Policy risk |
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