Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty
AbstractThe present paper analyzes the investment effects of emission trading scheme (ETS) when emission permits are bankable and there is technological uncertainty with regard to the abatement cost. A real option model is employed to accommodate irreversibility of investment and cost uncertainty. In the absence of abatement cost uncertainty, a bankable ETS reduces a firm's incentive for environmental investment, because the firm can utilize the banked permits for future compliance which act as substitutes for abatement investment. However, when cost uncertainty is prevalent, investment may reduce the opportunity cost of irreversible investment under the banking system, thereby increasing a firm's investment incentive. The condition is derived under which a bankable ETS provides higher investment incentives than a non-bankable ETS does.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 29 (2012)
Issue (Month): 4 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Emission permit; Banking; Real option; Investment;
Find related papers by JEL classification:
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
- Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
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