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Environmental Protection, Public Finance Requirements and the Timing of Emission Reductions

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  • Elettra Agliardi

    ()
    (Department of Economics, University of Bologna and Rimini Center for Economic Analysis)

  • Luigi Sereno

    ()
    (Department of Economics, University of Bologna)

Abstract

The effects of four environmental policy options for the reduction of pollution emissions, i.e. taxes, emission standards, auctioned permits and freely allocated permits, are analyzed. The setup is a real option model where the amount of emissions is determined by solving the firm'’s profit maximization problem under each policy instrument. The regulator solves an optimal stopping problem in order to find the critical threshold for policy adoptions taking into account revenues from taxes and auctioned permits and government spending. In this framework, we find the ranking of the alternative policy options in terms of their adoption lag and social welfare. We show that when the output demand is elastic emission standards are preferred to freely allocated permits. Taxes and auctioned permits are always equivalent in terms of their adoption lag and social welfare and also equivalent to emission standards when the regulator redistributes revenues.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 53_11.

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Date of creation: Dec 2011
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Handle: RePEc:rim:rimwps:53_11

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Keywords: Environmental policies; Taxes; Emission standards; Permits; Public abatement spending; Optimal implementation time; Real options;

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References

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  1. Elettra Agliardi & Luigi Sereno, 2011. "The effects of environmental taxes and quotas on the optimal timing of emission reductions under Choquet-Brownian uncertainty," Discussion Papers 2011/109, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  2. Conrad, Jon M., 2000. "Wilderness: options to preserve, extract, or develop," Resource and Energy Economics, Elsevier, vol. 22(3), pages 205-219, July.
  3. Jon M. Conrad, 1997. "Global Warming: When to Bite the Bullet," Land Economics, University of Wisconsin Press, vol. 73(2), pages 164-173.
  4. Saltari, Enrico & Travaglini, Giuseppe, 2011. "The effects of environmental policies on the abatement investment decisions of a green firm," Resource and Energy Economics, Elsevier, vol. 33(3), pages 666-685, September.
  5. Anastasios Xepapadeas, 1999. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions Under Uncertainty and Irreversibility," NBER Technical Working Papers 0243, National Bureau of Economic Research, Inc.
  6. Balikcioglu, Metin & Fackler, Paul L. & Pindyck, Robert S., 2011. "Solving optimal timing problems in environmental economics," Resource and Energy Economics, Elsevier, vol. 33(3), pages 761-768, September.
  7. Pindyck, Robert S., 1998. "Irreversibilities and the timing of environmental policy," Working papers WP 4047-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Juan-Pablo Montero, 2002. "Market Structure and Environmental Innovation," Documentos de Trabajo 215, Instituto de Economia. Pontificia Universidad Católica de Chile..
  9. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1677-1697, August.
  10. Coria, Jessica, 2008. "Taxes, Permits, and the Diffusions of a New Technology," Discussion Papers dp-08-26-efd, Resources For the Future.
  11. Atsuyuki Ohyama & Motoh Tsujimura, 2006. "Political Measures for Strategic Environmental Policy with External Effects," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 35(2), pages 109-135, October.
  12. Wirl, Franz, 2006. "Consequences of irreversibilities on optimal intertemporal CO2 emission policies under uncertainty," Resource and Energy Economics, Elsevier, vol. 28(2), pages 105-123, May.
  13. Margaret Insley, 2003. "On the option to invest in pollution control under a regime of tradable emissions allowances," Canadian Journal of Economics, Canadian Economics Association, vol. 36(4), pages 860-883, November.
  14. Montero, Juan-Pablo, 2002. "Permits, Standards, and Technology Innovation," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 23-44, July.
  15. van Soest, Daan P., 2005. "The impact of environmental policy instruments on the timing of adoption of energy-saving technologies," Resource and Energy Economics, Elsevier, vol. 27(3), pages 235-247, October.
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Cited by:
  1. Ohler, Adrienne M., 2014. "Behavior of the firm under rate-of-return regulation with two capital inputs," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 61-69.
  2. Enrico Saltari & Giuseppe Travaglini, 2013. "Optimal Waste Control with Abatement and Productive Capital Stocks," Working Papers 1301, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2013.
  3. E. Agliardi & L. Sereno, 2012. "On the optimal timing of switching from non-renewable to renewable resources: dirty vs clean energy sources and the relative efficiency of generators," Working Papers wp855, Dipartimento Scienze Economiche, Universita' di Bologna.

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