Policy Uncertainty and Investment in Low-Carbon Technology
AbstractIn the context of an emission trading scheme (ETS), we study how uncertainty over the environmental policy affectsfirms' investment in low-carbon technologies. We develop a three period sequential model that combines the industry and the electricity sectors and encompasses both irreversible and reversible investment possibilities for the firms. Additionally, we explicitly model the policy uncertainty in the regulator's objective function as well as the market interactions that give rise to an endogenous price of permits. We find that uncertainty reduces irreversible investment and that the availability of both reversible and irreversible technologies partially eliminates the positive effect of policy uncertainty on reversible technology found in previous literature. Furthermore, we provide a framework that allows to assess the efficiency of different implementations of the scheme.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2012/27.
Date of creation: 2012
Date of revision:
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Emission Trading Scheme; low-carbon investment; policy uncertainty; mechanism design; irreversible and reversible investment;
Find related papers by JEL classification:
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
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