IDEAS home Printed from https://ideas.repec.org/p/ctl/louvec/2005049.html

Environmental policy and speculation on markets for emission permits

Author

Listed:
  • Paolo, COLLA
  • Marc, GERMAIN

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Vincent, VAN STEENBERGHE

Abstract

Tradable emission permits share many characteristics with financial assets. As on financial markets, speculators are likely to be active on large markets for emission permits such as those developing under the Kyoto Protocol. We show how the presence of speculators on a market for emission permits affects the price of these permits when firms face risk aversion. The agency in charge of the optimal environmental policy should account for the presence of speculators when determining the total amount of permits to issue.

Suggested Citation

  • Paolo, COLLA & Marc, GERMAIN & Vincent, VAN STEENBERGHE, 2005. "Environmental policy and speculation on markets for emission permits," Discussion Papers (ECON - Département des Sciences Economiques) 2005049, Université catholique de Louvain, Département des Sciences Economiques.
    • Handle: RePEc:ctl:louvec:2005049
    as

    Download full text from publisher

    File URL: http://sites.uclouvain.be/econ/DP/IRES/2005-49.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. J. Albrecht & T. Verbeke & M. De Clercq, 2004. "Informational efficiency of the US SO2 permit market," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/250, Ghent University, Faculty of Economics and Business Administration.
    2. Stavins, Robert N., 2004. "Environmental Economics," Discussion Papers 10841, Resources for the Future.
    3. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
    4. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435, Elsevier.
    5. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    6. Germain, Marc & Lovo, Stefano & Vansteenberghe, Vincent, 2000. "De l'importance de la microstructure d'un marché de permis de polluer," LIDAM Discussion Papers IRES 2000010, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    7. Baldursson, Fridrik M & von der Fehr, N.-H.M.Nils-Henrik M, 2004. "Price volatility and risk exposure: on market-based environmental policy instruments," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 682-704, July.
    8. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 347-400, December.
    9. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    10. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    11. Antonio E. Bernardo & Ivo Welch, 2004. "Liquidity and Financial Market Runs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 135-158.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:ceu:econwp:2012_5 is not listed on IDEAS
    2. Tietjen, Oliver & Lessmann, Kai & Pahle, Michael, 2021. "Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion," Resource and Energy Economics, Elsevier, vol. 63(C).
    3. Corina Haita-Falah, 2016. "Uncertainty and speculators in an auction for emissions permits," Journal of Regulatory Economics, Springer, vol. 49(3), pages 315-343, June.
    4. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    5. Silvia Albrizio & Helia Costa, 2012. "Policy Uncertainty and Investment in Low-Carbon Technology," Economics Working Papers ECO2012/27, European University Institute.
    6. Cyril Monnet & Ted Temzelides, 2016. "Monetary emissions trading mechanisms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(1), pages 85-100, March.
    7. Havrland, Bohumil & Satyakti, Yayan, 2011. "The Impact of Biofuels Policy on Trade and Food Security in Developing Countries," Conference papers 332087, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    8. Baran Doda, Simon Quemin, Luca Taschini, 2017. "A theory of gains from trade in multilaterally linked ETSs," GRI Working Papers 275, Grantham Research Institute on Climate Change and the Environment.
    9. Rannou, Yves, 2019. "Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures," Economic Modelling, Elsevier, vol. 81(C), pages 387-410.
    10. Rupayan Pal & Bibhas Saha, 2011. "Environmental outcomes in a model of mixed duopoly," University of East Anglia Applied and Financial Economics Working Paper Series 030, School of Economics, University of East Anglia, Norwich, UK..
    11. Xie, Chi & Cui, Zheng & Long, Daniel Zhuoyu & Qi, Jin, 2025. "Distributionally robust optimization for minimizing price fluctuations in quota system," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 193(C).
    12. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    13. Bárcena-Ruiz, Juan Carlos & Sagasta, Amagoia, 2021. "Environmental policies with consumer-friendly firms and cross-ownership," Economic Modelling, Elsevier, vol. 103(C).
    14. Anne Schopp & Karsten Neuhoff, 2013. "The Role of Hedging in Carbon Markets," Discussion Papers of DIW Berlin 1271, DIW Berlin, German Institute for Economic Research.
    15. Pauli Lappi, 2017. "Too many traders? On the welfare ranking of prices and quantities," Economics Bulletin, AccessEcon, vol. 37(3), pages 1959-1965.
    16. Rupayan Pal & Bibhas Saha, 2014. "Mixed Duopoly and Environment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 96-118, February.
    17. Ziwei Wang & Yibo Liu & Peng Lu, 2026. "Does Cutting Carbon Emissions Reduce Tail Risk Spillovers? A Quantile LSTM‐KAN‐CoVaR Approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 46(2), pages 381-412, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stavins, Robert & Hahn, Robert & Cavanagh, Sheila, 2001. "National Environmental Policy During the Clinton Years," RFF Working Paper Series dp-01-38, Resources for the Future.
    2. Olivier Rousse & Benoît Sévi, 2005. "Behavioral Heterogeneity in the US Sulfur Dioxide Emissions Allowance Trading Program," ERSA conference papers ersa05p550, European Regional Science Association.
    3. Baldursson, Fridrik M & von der Fehr, N.-H.M.Nils-Henrik M, 2004. "Price volatility and risk exposure: on market-based environmental policy instruments," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 682-704, July.
    4. Holland, Stephen P. & Moore, Michael R., 2013. "Market design in cap and trade programs: Permit validity and compliance timing," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 671-687.
    5. Fridrik Baldursson & Nils-Henrik Fehr, 2012. "Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 52(2), pages 213-233, June.
    6. Fridrik Baldursson & Jon Sturluson, 2011. "Fees and the Efficiency of Tradable Permit Systems: An Experimental Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(1), pages 25-41, January.
    7. Robert W. Hahn & Robert N. Stavins, 2011. "The Effect of Allowance Allocations on Cap-and-Trade System Performance," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 267-294.
    8. Stavins, Robert N., 2004. "Environmental Economics," Discussion Papers 10841, Resources for the Future.
    9. Bernard Dumas & Alexander Kurshev & Raman Uppal, 2005. "What Can Rational Investors Do About Excessive Volatility and Sentiment Fluctuations?," NBER Working Papers 11803, National Bureau of Economic Research, Inc.
    10. Hirota, Shinichi & Huber, Juergen & Stöckl, Thomas & Sunder, Shyam, 2022. "Speculation, money supply and price indeterminacy in financial markets: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1275-1296.
    11. Stavins, Robert, 2001. "Lessons From the American Experiment With Market-Based Environmental Policies," RFF Working Paper Series dp-01-53, Resources for the Future.
    12. Kaizoji, Taisei (kaizoji@icu.ac.jp), 2010. "A Behavioral Model of Bubbles and Crashes," MPRA Paper 20352, University Library of Munich, Germany.
    13. Pietro Peretto, 2008. "Effluent taxes, market structure, and the rate and direction of endogenous technological change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 39(2), pages 113-138, February.
    14. Oludamola Durodola & Deepika Chotee, 2019. "Cannabis Stock behavior and Investor’s Expectations on the TSX: A Mixed Method Approach," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 4(2), pages 56-62.
    15. Stavins, Robert N., 2004. "Can an Effective Global Climate Treaty Be Based on Sound Science, Rational Economics, and Pragmatic Politics," Discussion Papers 10720, Resources for the Future.
    16. Havrland, Bohumil & Satyakti, Yayan, 2011. "The Impact of Biofuels Policy on Trade and Food Security in Developing Countries," Conference papers 332087, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    17. Morten Søberg, 2000. "Imperfect competition, sequential auctions, and emissions trading: An experimental evaluation," Discussion Papers 280, Statistics Norway, Research Department.
    18. Coria, Jessica & Sterner, Thomas, 2008. "Tradable Permits in Developing Countries: Evidence from Air Pollution in Santiago, Chile," RFF Working Paper Series dp-08-51, Resources for the Future.
    19. Olmstead, Sheila M. & Stavins, Robert N., 2009. "An Expanded Three-Part Architecture for Post-2012 International Climate Policy," Working Paper Series rwp09-036, Harvard University, John F. Kennedy School of Government.
    20. Wambach, Achim, 1999. "Bertrand competition under cost uncertainty," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 941-951, October.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ctl:louvec:2005049. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Virginie LEBLANC (email available below). General contact details of provider: https://edirc.repec.org/data/iruclbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.