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Hedging in Coal Contracts under the Acid Rain Program

Tradable permit schemes introduce uncertainty into the cost of regulatory compliance due to the permits’ uncertain price. Regulated firms can hedge this uncertainty through their contracts for fuel procurement. Data on coal contracts are used to estimate how the option not to be delivered higher-sulfur coal is priced. Results show that under a tradable permit scheme, coal prices are reduced for an increase in the sulfur bound controlling for reductions in price due to higher delivered sulfur content.

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File URL: http://le.uwpress.org/cgi/reprint/88/3/561
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Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 88 (2012)
Issue (Month): 3 ()
Pages: 561-570

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Handle: RePEc:uwp:landec:v:88:y:2012:iii:1:p:561-570
Contact details of provider: Web page: http://le.uwpress.org/

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  1. Maria Kozhevnikova & Ian Lange, 2009. "Determinants of Contract Duration: Further Evidence from Coal-Fired Power Plants," Review of Industrial Organization, Springer, vol. 34(3), pages 217-229, May.
  2. Keith J. Crocker & Scott E. Masten, 1988. "Mitigating Contractual Hazards: Unilateral Options and Contract Length," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 327-343, Autumn.
  3. Meghan R. Busse & Nathaniel O. Keohane, 2007. "Market effects of environmental regulation: coal, railroads, and the 1990 Clean Air Act," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1159-1179, December.
  4. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-93, December.
  5. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, 1.
    • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, 1.
  6. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  7. Lange Ian & Bellas Allen S, 2007. "The 1990 Clean Air Act and the Implicit Price of Sulfur in Coal," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-25, August.
  8. Shaul Ben-David & David Brookshire & Stuart Burness & Michael McKee & Christian Schmidt, 2000. "Attitudes toward Risk and Compliance in Emission Permit Markets," Land Economics, University of Wisconsin Press, vol. 76(4), pages 590-600.
  9. Douglas J. Lober & Michael Bailey, 1997. "Organizational strategy, managerial decision-making, and market-based environmental policies: utility company bidding behavior in the sulfur dioxide allowance trading auctions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(6), pages 471-489.
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