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The influence of the allocation method on market liquidity, volatility and firms’ investment decisions

In: Emissions Trading

Author

Listed:
  • Frank Gagelmann

    (Reserve Management Bismarckplatz)

Abstract

When taking incomplete information and risk into account, it is likely that the primary allocation method has an impact on static efficiency and also on firms‘ investment and innovation decisions. Market liquidity and allowance price volatility are crucial factors in this respect. Benchmarking is, from a simple analytical finding, more conducive to a liquid market in the first years of an ET system than grandfathering. This in turn influences firms’ expectations about the future market development, including volatility. A liquid market is more conducive to all abatement approaches that are connected to investment, including to innovation. The degree of this effect depends, among other things, on the availability of non-investment abatement approaches, the nature of the price shocks and the precise risk treatment by firms.

Suggested Citation

  • Frank Gagelmann, 2008. "The influence of the allocation method on market liquidity, volatility and firms’ investment decisions," Springer Books, in: Ralf Antes & Bernd Hansjürgens & Peter Letmathe (ed.), Emissions Trading, pages 69-88, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-73653-2_5
    DOI: 10.1007/978-0-387-73653-2_5
    as

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