This paper analyzes investment effect of tradable permit program (TPP) when emission permits are bankable and there is technological uncertainty regarding abatement cost. In the absence of uncertainty, a firm's incentive to environmental investment decreases under a bankable TPP compared to a non-bankable TPP because the firm can use banked permits for future abatement compliance. However, when cost uncertainty is prevalent, there arises a real option value of environmental investment that may change a firm's investment strategy. The condition is derived under which a bankable TPP provides higher investment incentive than a non-bankable TPP.
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