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Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits And Emissions Charges

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  • Zhao, Jinhua

Abstract

A major concern with TEPs is that stochastic permit prices may discourage abatement investment relative to other policies such as a fixed emissions charge. However, the price uncertainty is fundamentally caused by abatement cost uncertainties, which affect investment under both policies. We develop a rational expectations general equilibrium model of permit trading to show how uncertainty reduces investment. Differences between the two policies can be decomposed into a general equilibrium effect and a price-vs-quantity effect. Except for the curvature of the payoff functions, uncertainties reduce both effects: tradable permits in fact helps maintain firms' investment incentives under uncertainty.

Suggested Citation

  • Zhao, Jinhua, 2000. "Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits And Emissions Charges," 2000 Annual meeting, July 30-August 2, Tampa, FL 21816, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea00:21816
    DOI: 10.22004/ag.econ.21816
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    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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