Pooling of Uncertainty: Enforcing Tradable Permits Regulation when Emissions are Stochastic |
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Authors: | Email author" target="_blank">Janusz?R?MrozekEmail author Andrew?G?Keeler |
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Institution: | (1) CapAnalysis, 1299 Pennsylvania Avenue, NW, Washington, DC, 20004-2402, USA;(2) University of Georgia, Athens, Georgia, USA |
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Abstract: | An under-appreciated advantage of tradable permits regulation is its ability to create better decision-making when emissions are stochastic. In general, the distribution of stochastic actual emissions around intended emissions results in over- or under-compliance. Permit tradability reduces the extent to which actual aggregate emissions deviate from regulatory targets, by giving firms an additional mechanism for responding to uncertainty. We construct a two period model of permit regulation with ex post enforcement to demonstrate how the permit market distributes uncertainty, and to illustrate the importance of expectations toward permit market outcomes. |
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Keywords: | enforcement environmental regulation stochastic emissions tradable permits uncertainty |
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