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Attitudes toward Risk and Compliance in Emission Permit Markets

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Author Info

  • Shaul Ben-David
  • David Brookshire
  • Stuart Burness
  • Michael McKee
  • Christian Schmidt

Abstract

We investigate the effects of uncertainty and concomitant risk aversion as they impact the incentive structure and subsequent operation of an emissions permit market modeled after the U.S. S02 market. Our theoretical results suggest that uncertainty dulls incentives to achieve cost savings through permit trading and inhibits efficient allocation of abatement efforts by firms. We test hypotheses in an experimental laboratory setting and find that the irreversibility of investment in abatement technology may present countervailing incentives for potential sellers of permits, resulting in a wait and see attitude toward adoption of efficient levels of abatement technology

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 76 (2000)
Issue (Month): 4 ()
Pages: 590-600

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Handle: RePEc:uwp:landec:v:76:y:2000:i:4:p:590-600

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Web page: http://le.uwpress.org/

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  1. Stuart Mestelman & Andrew Muller, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain," McMaster Experimental Economics Laboratory Publications 1997-01, McMaster University.
  2. Cason, Timothy N. & Plott, Charles R., 1996. "EPA's New Emissions Trading Mechanism: A Laboratory Evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 133-160, March.
  3. R. Andrew Muller & Stuart Mestelman, 1994. "Emission Trading with Shares and Coupons: A Laboratory Experiment," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 185-211.
  4. 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.
  5. Cason Timothy N., 1993. "Seller Incentive Properties of EPA's Emission Trading Auction," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 177-195, September.
  6. Franciosi Robert & Isaac R. Mark & Pingry David E. & Reynolds Stanley S., 1993. "An Experimental Investigation of the Hahn-Noll Revenue Neutral Auction for Emissions Licenses," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 1-24, January.
  7. Rose, Kenneth, 1995. "Twelve common myths of allowance trading: Improving the level of discussion," The Electricity Journal, Elsevier, vol. 8(4), pages 64-69, May.
  8. Karl Hausker, 1992. "The politics and economics of auction design in the market for sulfur dioxide pollution," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 11(4), pages 553-572.
  9. Cason, Timothy N & Gangadharan, Lata, 1998. "An Experimental Study of Electronic Bulletin Board Trading for Emission Permits," Journal of Regulatory Economics, Springer, vol. 14(1), pages 55-73, July.
  10. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September.
  11. Burtraw, Dallas & Bohi, Douglas, 1997. "SO2 Allowance Trading: How Experience and Expectations Measure Up," Discussion Papers dp-97-24, Resources For the Future.
  12. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  13. 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.
  14. Ben-David, Shaul & Brookshire, David S. & Burness, Stuart & McKee, Michael & Schmidt, Christian, 1999. "Heterogeneity, Irreversible Production Choices, and Efficiency in Emission Permit Markets," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 176-194, September.
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