Markets for emission permits with free endowment: a vintage capital analysis
In this paper we develop a vintage capital model for a firm involved in a market for tradable emission permits. We analyze both the firmâ€™s optimal investment plans and the market equilibrium. This allows us to scrutinize how firms use permits free endowment, and to highlight the implications of non-optimal uses both at the firm and at the market level. We provide a new rationale for the market of tradable permits not to be cost-efficient. The novel technical points in this context are the use a distributed (vintage) optimal control model of the firm, the use of optimality conditions for non-smooth problems, and the involvement of a nonlinear Fredholm integral equation of the first kind for the description of the equilibrium price of permits, and its practical meaning for market regularization.
|Date of creation:||01 May 2010|
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