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Investment Effect of Emission Permits Banking under Technological Uncertainty


  • Lars J. Olson
  • Hojeong Park


This paper analyzes investment effect of tradable permit program (TPP) when emission permits are bankable and there is technological uncertainty regarding abatement cost. In the absence of uncertainty, a firm's incentive to environmental investment decreases under a bankable TPP compared to a non-bankable TPP because the firm can use banked permits for future abatement compliance. However, when cost uncertainty is prevalent, there arises a real option value of environmental investment that may change a firm's investment strategy. The condition is derived under which a bankable TPP provides higher investment incentive than a non-bankable TPP.

Suggested Citation

  • Lars J. Olson & Hojeong Park, 2004. "Investment Effect of Emission Permits Banking under Technological Uncertainty," Econometric Society 2004 Far Eastern Meetings 677, Econometric Society.
  • Handle: RePEc:ecm:feam04:677

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    More about this item


    real option; uncertainty; bankable tradable emission permits;

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis


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