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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14994.
Date of creation: Apr 2009
Date of revision:
regulation; effluent taxes; tradable quotas; uncertainty; risk aversion; environmental management;
Other versions of this item:
- Fridrik Baldursson & Nils-Henrik Fehr, 2012. "Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 52(2), pages 213-233, June.
- 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.
- Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- 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
- D9 - Microeconomics - - Intertemporal Choice
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-09 (All new papers)
- NEP-BEC-2009-05-09 (Business Economics)
- NEP-ENE-2009-05-09 (Energy Economics)
- NEP-ENV-2009-05-09 (Environmental Economics)
- NEP-REG-2009-05-09 (Regulation)
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