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Investment Effect of Emission Permits Banking under Technological Uncertainty

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  • Lars J. Olson
  • Hojeong Park

Abstract

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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    References listed on IDEAS

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    More about this item

    Keywords

    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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