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Bankable emission permits under uncertainty and optimal risk-management rules

  • Chevallier, Julien
  • Etner, Johanna
  • Jouvet, Pierre-André

This article proposes a theory of banking of emission permits under conditions of regulatory uncertainty. Based on a two-period partial equilibrium framework, we examine the effects of increasing risk-in the sense of a mean preserving spread-regarding a future permit allocation at the firm level. We also examine the role of an agency to pool risks by re-allocating permits for a group of firms. Our results are twofold. First, an increase in risk may lead to changes in a firm's banking strategy, depending on the third partial derivative of its production function with respect to pollution. Second, we define an optimal risk-sharing rule between agents to respond to political decision changes. Our results overall suggest that the bankability of permits may be used as a risk-management tool.

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Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 65 (2011)
Issue (Month): 4 (December)
Pages: 332-339

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Handle: RePEc:eee:reecon:v:65:y:2011:i:4:p:332-339
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

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