Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets
AbstractWe 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.
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Bibliographic InfoArticle provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.
Volume (Year): 52 (2012)
Issue (Month): 2 (June)
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Web page: http://www.springerlink.com/link.asp?id=100263
Regulation; Effluent taxes; Tradable quotas; Uncertainty; Risk aversion; Environmental management; D81; D9; H23; L51; Q28; Q38;
Other versions of this item:
- Baldursson, Fridrik M. & Fehr, Nils-Henrik M. von der, 2009. "Price volatility and risk exposure: on the interaction of quota and product markets," MPRA Paper 14994, University Library of Munich, Germany.
- Baldursson, Fridrik M. & von der Fehr, Nils-Henrik M., 2009. "Price Volatility and Risk Exposure: on the Interaction of Quota and Product Markets," Memorandum 11/2009, Oslo University, Department of Economics.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
- Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
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