Risk management and regulation compliance with tradable permits under dynamic uncertainty
In this paper, we explore the effects of dynamic uncertainty on the risk management of regulated industries and emission market. We consider as major sources of uncertainty the stochastic growth of demand for the industry output (e.g. electric energy) and the ensuing lack of information on the pollution levels of individual firms, their behavior and the behavior of the regulator. These sources of uncertainty are common in pollution permit trading as not only does the market respond to the volatility of fundamentals but also to the vagaries of the institutional structure, created by public policy and enforced through regulation. The paper shows that in the presence of strategic behavior on the part of the agents involved, even though both the level and the volatility of output increases over time, trading of permits is a highly effective instrument of risk management, since it allows the firms to pool the risks arising from the volatile environment, thereby simplifying enforcement, reducing emissions and improving resource allocation. Moreover, uncertainty plays a subtle influencing role, since on one hand it broadens the regulator’s deterrent power over potential polluters, while on the other it reduces the expected value of the sanction for the individual firm.
(This abstract was borrowed from another version of this item.)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Juan-Pablo Montero, 2004.
"Pollution markets with imperfectly observed emissions,"
0414, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Juan-Pablo Montero, 2005. "Pollution Markets with Imperfectly Observed Emissions," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 645-660, Autumn.
- Montero, J-P., 2004. "Pollution Markets with Imperfectly Observed Emissions," Cambridge Working Papers in Economics 0456, Faculty of Economics, University of Cambridge.
- Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
- Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
- Franz Wirl & Juergen Noll, 2008. "Abatement and Permits when Pollution is Uncertain and Violations are Fined," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(2), pages 299-312, June.
- Evy Crals & Lode Vereeck, 2005. "Taxes, Tradable Rights and Transaction Costs," European Journal of Law and Economics, Springer, vol. 20(2), pages 199-223, September.
- Graetz, Michael J. & Reinganum, Jennifer F. & Wilde, Louis L., .
"The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement,"
589, California Institute of Technology, Division of the Humanities and Social Sciences.
- Graetz, Michael J & Reinganum, Jennifer F & Wilde, Louis L, 1986. "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(1), pages 1-32, Spring.
- Hatcher, Aaron, 2005. "Non-compliance and the quota price in an ITQ fishery," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 427-436, May.
- Gary S. Becker, 1974.
"Crime and Punishment: An Economic Approach,"
in: Essays in the Economics of Crime and Punishment, pages 1-54
National Bureau of Economic Research, Inc.
- Plourde, Charles & Yeung, David, 1989. "A model of industrial pollution in a stochastic environment," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 97-105, March.
- Odin K. Knudsen & Pasquale Lucio Scandizzo, 2004.
"Bringing Social Standards into Project Evaluation Under Dynamic Uncertainity,"
CEIS Research Paper
63, Tor Vergata University, CEIS.
- Odin K. Knudsen & Pasquale L. Scandizzo, 2006. "Bringing Social Standards into Project Evaluation Under Dynamic Uncertainty," CEIS Research Paper 87, Tor Vergata University, CEIS.
- Beavis, Brian & Walker, Martin, 1983. "Random wastes, imperfect monitoring and environmental quality standards," Journal of Public Economics, Elsevier, vol. 21(3), pages 377-387, August.
- Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November.
- Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
- Elizabeth Olmsted Teisberg, 1994. "An Option Valuation Analysis of Investment Choices by a Regulated Firm," Management Science, INFORMS, vol. 40(4), pages 535-548, April.
- E. Woerdman & O. Couwenberg & A. Nentjes, 2009. "Energy prices and emissions trading: windfall profits from grandfathering?," European Journal of Law and Economics, Springer, vol. 28(2), pages 185-202, October.
- Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
When requesting a correction, please mention this item's handle: RePEc:kap:ejlwec:v:33:y:2012:i:1:p:127-157. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.