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Policy Uncertainty and Investment in Low-Carbon Technology

  • Silvia Albrizio
  • Helia Costa

In the context of an emission trading scheme (ETS), we study how uncertainty over the environmental policy affectsfirms' investment in low-carbon technologies. We develop a three period sequential model that combines the industry and the electricity sectors and encompasses both irreversible and reversible investment possibilities for the firms. Additionally, we explicitly model the policy uncertainty in the regulator's objective function as well as the market interactions that give rise to an endogenous price of permits. We find that uncertainty reduces irreversible investment and that the availability of both reversible and irreversible technologies partially eliminates the positive effect of policy uncertainty on reversible technology found in previous literature. Furthermore, we provide a framework that allows to assess the efficiency of different implementations of the scheme.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2012/27.

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Date of creation: 2012
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Handle: RePEc:eui:euiwps:eco2012/27
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  1. Yihsu Chen & Chung-Li Tseng, 2011. "Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 169-174.
  2. COLLA, Paolo & GERMAIN, Marc & VAN STEENBERGHE, Vincent, 2005. "Environmental policy and speculation on markets for emission permits," CORE Discussion Papers 2005066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Harrison Fell & Richard Morgenstern, 2010. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(2), pages 275-297, October.
  4. Julien Chevallier, 2011. "Econometric analysis of carbon markets: the european union emissions trading scheme and the clean development mechanism," Economics Bulletin, AccessEcon, vol. 31(4), pages A53.
  5. De Perthuis, Christian & Convery, Frank J. & Ellerman, Denny, 2010. "Pricing carbon : the European Union Emissions Trading Scheme," Economics Papers from University Paris Dauphine 123456789/10174, Paris Dauphine University.
  6. Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom & Yang, Ming, 2007. "Investment risks under uncertain climate change policy," Energy Policy, Elsevier, vol. 35(11), pages 5766-5773, November.
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