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Pollution permits, Strategic Trading and Dynamic Technology Adoption

  • Santiago Moreno-Bromberg
  • Luca Taschini

This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can invest both in low-emitting production technologies and trade permits. In the model, technology adoption and allowance price are generated endogenously and are inter-dependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value reflects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status. These conditions are also satisfied when a price support instrument, which is contingent on the adoption of the new technology, is introduced. Numerical investigation confirms that this policy generates a floating price floor for the allowances, and it restores the dynamic incentives to invest. Given that this policy comes at a cost, a criterion for the selection of a self-financing policy (based on convex risk measures) is proposed and implemented.

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File URL: http://arxiv.org/pdf/1103.2914
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Paper provided by arXiv.org in its series Papers with number 1103.2914.

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Date of creation: Mar 2011
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Handle: RePEc:arx:papers:1103.2914
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