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Environmental Policy and Speculation on Markets for Emission Permits

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  • PAOLO COLLA
  • MARC GERMAIN
  • VINCENT Van STEENBERGHE

Abstract

Tradable emission permits share many characteristics with financial assets. As on financial markets, speculators are likely to be active on large markets for emission permits such as those developing under the Kyoto Protocol. We show how the presence of speculators on a market for emission permits affects the price of these permits when firms face risk aversion. The agency in charge of the optimal environmental policy should account for the presence of speculators when determining the total amount of permits to issue.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 79 (2012)
Issue (Month): 313 (01)
Pages: 152-182

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Handle: RePEc:bla:econom:v:79:y:2012:i:313:p:152-182

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References

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  1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
  2. J. Albrecht & T. Verbeke & M. De Clercq, 2004. "Informational efficiency of the US SO2 permit market," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/250, Ghent University, Faculty of Economics and Business Administration.
  3. Stavins, Robert, 2001. "Experience with Market-Based Environmental Policy Instruments," Discussion Papers dp-01-58, Resources For the Future.
  4. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  5. Antonio Bernardo & Ivo Welch, 2006. "Liquidity and Financial Market Runs," Yale School of Management Working Papers ysm280, Yale School of Management, revised 01 Aug 2003.
  6. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
  7. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  8. Stavins, Robert, 2004. "Environmental Economics," Discussion Papers dp-04-54, Resources For the Future.
  9. Baldursson, Fridrik M & von der Fehr, N.-H.M.Nils-Henrik M, 2004. "Price volatility and risk exposure: on market-based environmental policy instruments," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 682-704, July.
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Cited by:
  1. Rupayan Pal & Bibhas Saha, 2011. "Environmental outcomes in a model of mixed duopoly," University of East Anglia Applied and Financial Economics Working Paper Series 030, School of Economics, University of East Anglia, Norwich, UK..
  2. Anne Schopp & Karsten Neuhoff, 2013. "The Role of Hedging in Carbon Markets," Discussion Papers of DIW Berlin 1271, DIW Berlin, German Institute for Economic Research.
  3. Cyril Monnet & Ted Temzelides, 2014. "Monetary Emissions Trading Mechanisms," CESifo Working Paper Series 4633, CESifo Group Munich.
  4. repec:ceu:econwp:2012_5 is not listed on IDEAS
  5. Silvia Albrizio & Helia Costa, 2012. "Policy Uncertainty and Investment in Low-Carbon Technology," Economics Working Papers ECO2012/27, European University Institute.

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