IDEAS home Printed from https://ideas.repec.org/p/ias/cpaper/00-wp252.html
   My bibliography  Save this paper

Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits and Emissions Charges

Author

Listed:
  • Jinhua Zhao

Abstract

A major concern with tradable emission permits (TEPs) is that stochastic permit prices may reduce firm incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge. However, under efficient permit trading, the price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. The authors develop a rational expectations general equilibrium model of permit trading to show how cost uncertainty affects investment. Differences between the two policies can be decomposed into a general equilibrium effect and a price-versus-quantity effect. Except for the curvature of the payoff functions, uncertainties reduce both effects so that tradable permits in fact help maintain firms' investment incentive under uncertainty.

Suggested Citation

  • Jinhua Zhao, 2000. "Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits and Emissions Charges," Center for Agricultural and Rural Development (CARD) Publications 00-wp252, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:00-wp252
    as

    Download full text from publisher

    File URL: https://www.card.iastate.edu/products/publications/pdf/00wp252.pdf
    File Function: Full Text
    Download Restriction: no

    File URL: https://www.card.iastate.edu/products/publications/synopsis/?p=301
    File Function: Online Synopsis
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
    2. Y.H. Farzin & P.M. Kort, 2000. "Pollution Abatement Investment When Environmental Regulation Is Uncertain," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(2), pages 183-212, April.
    3. Parry, Ian W H, 1998. "Pollution Regulation and the Efficiency Gains from Technological Innovation," Journal of Regulatory Economics, Springer, vol. 14(3), pages 229-254, November.
    4. Farzin, Y. H. & Huisman, K. J. M. & Kort, P. M., 1998. "Optimal timing of technology adoption," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 779-799, May.
    5. Orr, Lloyd, 1976. "Incentive for Innovation as the Basis for Effluent Charge Strategy," American Economic Review, American Economic Association, vol. 66(2), pages 441-447, May.
    6. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-1384, December.
    7. Abel, Andrew B. & Eberly, Janice C., 1997. "An exact solution for the investment and value of a firm facing uncertainty, adjustment costs, and irreversibility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 831-852, May.
    8. Dallas Burtraw, 1996. "The So2 Emissions Trading Program: Cost Savings Without Allowance Trades," Contemporary Economic Policy, Western Economic Association International, vol. 14(2), pages 79-94, April.
    9. Gersbach, Hans & Glazer, Amihai, 1999. "Markets and Regulatory Hold-Up Problems," Journal of Environmental Economics and Management, Elsevier, vol. 37(2), pages 151-164, March.
    10. Fridrik M. Baldursson & Nils‐Henrik M. Von Der Fehr, 2004. "Prices vs. Quantities: The Irrelevance of Irreversibility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 805-821, December.
    11. Stephen Morris & Stephen Coate, 1999. "Policy Persistence," American Economic Review, American Economic Association, vol. 89(5), pages 1327-1336, December.
    12. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 4, pages 76-84, Palgrave Macmillan.
    13. Claude Henry, 1974. "Investment decisions under uncertainty: The "irreversibility effect"," ULB Institutional Repository 2013/327343, ULB -- Universite Libre de Bruxelles.
    14. Chao, Hung-Po & Wilson, Robert, 1993. "Option Value of Emission Allowances," Journal of Regulatory Economics, Springer, vol. 5(3), pages 233-249, September.
    15. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-685, September.
    16. Richard G. Newell & Adam B. Jaffe & Robert N. Stavins, 1999. "The Induced Innovation Hypothesis and Energy-Saving Technological Change," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 941-975.
    17. Caballero, Ricardo J & Pindyck, Robert S, 1996. "Uncertainty, Investment, and Industry Evolution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-662, August.
    18. Biglaiser, Gary & Horowitz, John K & Quiggin, John, 1995. "Dynamic Pollution Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 33-44, July.
    19. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    20. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
    21. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
    22. Requate, Till, 1998. "Incentives to innovate under emission taxes and tradeable permits," European Journal of Political Economy, Elsevier, vol. 14(1), pages 139-165, February.
    23. Anastasios Xepapadeas, 2001. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions under Uncertainty and Irreversibility," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 281-308, National Bureau of Economic Research, Inc.
    24. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
    25. Magat, Wesley A., 1978. "Pollution control and technological advance: A dynamic model of the firm," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 1-25, March.
    26. John V. Leahy, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 1105-1133.
    27. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    Full references (including those not matched with items on IDEAS)

    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 & Jaffe, Adam & Newell, Richard, 2000. "Technological Change and the Environment," Working Paper Series rwp00-002, Harvard University, John F. Kennedy School of Government.
    2. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2003. "Chapter 11 Technological change and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 11, pages 461-516, Elsevier.
    3. van Soest, Daan P., 2005. "The impact of environmental policy instruments on the timing of adoption of energy-saving technologies," Resource and Energy Economics, Elsevier, vol. 27(3), pages 235-247, October.
    4. van Soest, D.P., 2005. "The impact of environmental policy instruments on the timing of adoption of energy-saving technologies," Other publications TiSEM 9ccb4811-1045-42cd-965f-2, Tilburg University, School of Economics and Management.
    5. Adam Jaffe & Richard Newell & Robert Stavins, 2002. "Environmental Policy and Technological Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 41-70, June.
    6. Popp, David & Newell, Richard G. & Jaffe, Adam B., 2010. "Energy, the Environment, and Technological Change," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 873-937, Elsevier.
    7. Krysiak, Frank C., 2008. "Prices vs. quantities: The effects on technology choice," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1275-1287, June.
    8. Saltari, Enrico & Travaglini, Giuseppe, 2011. "The effects of environmental policies on the abatement investment decisions of a green firm," Resource and Energy Economics, Elsevier, vol. 33(3), pages 666-685, September.
    9. Yoram Bauman & Myunghun Lee & Karl Seeley, 2008. "Does Technological Innovation Really Reduce Marginal Abatement Costs? Some Theory, Algebraic Evidence, and Policy Implications," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(4), pages 507-527, August.
    10. Stavins, Robert, 2001. "Lessons From the American Experiment With Market-Based Environmental Policies," RFF Working Paper Series dp-01-53, Resources for the Future.
    11. Karp, Larry S., 2008. "Correct (and misleading) argument for using market-based pollution control policies," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6030, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Parry, Ian & Pizer, William & Fischer, Carolyn, 2000. "How Important is Technological Innovation in Protecting the Environment?," RFF Working Paper Series dp-00-15, Resources for the Future.
    13. Cesare Dosi & Michele Moretto, 1997. "Pollution Accumulation and Firm Incentives to Accelerate Technological Change Under Uncertain Private Benefits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 10(3), pages 285-300, October.
    14. Baker, Erin & Clarke, Leon & Shittu, Ekundayo, 2008. "Technical change and the marginal cost of abatement," Energy Economics, Elsevier, vol. 30(6), pages 2799-2816, November.
    15. Suzi Kerr & Richard G. Newell, 2003. "Policy‐Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 317-343, September.
    16. Jessica Coria & Magnus Hennlock, 2012. "Taxes, permits and costly policy response to technological change," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 14(1), pages 35-60, January.
    17. Juan-Pablo Montero, 2002. "Market Structure and Environmental Innovation," Journal of Applied Economics, Universidad del CEMA, vol. 5, pages 293-325, November.
    18. Luca Corato & Michele Moretto & Sergio Vergalli, 2013. "Land conversion pace under uncertainty and irreversibility: too fast or too slow?," Journal of Economics, Springer, vol. 110(1), pages 45-82, September.
    19. Dagmar Nelissen & Till Requate, 2007. "Pollution-reducing and resource-saving technological progress," International Journal of Agricultural Resources, Governance and Ecology, Inderscience Enterprises Ltd, vol. 6(1), pages 5-44.
    20. Burtraw, Dallas, 2000. "Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S. Electricity Sector," RFF Working Paper Series dp-00-38, Resources for the Future.

    More about this item

    JEL classification:

    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

    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:ias:cpaper:00-wp252. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/caiasus.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.