Baldursson, Fridrik M. and Fehr, Nils-Henrik M. von der (2009): Price volatility and risk exposure: on the interaction of quota and product markets.
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We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is - whether it is `clean' or `dirty'- and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, the optimal initial quota allocation turns out to resemble a grandfathering regime: clean firms are allocated no quotas - dirty firms are allocated quotas for a part of their emissions.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour.
|Item Type:||MPRA Paper|
|Original Title:||Price volatility and risk exposure: on the interaction of quota and product markets|
|Keywords:||regulation, effluent taxes, tradable quotas, uncertainty, risk aversion, environmental management|
|Subjects:||Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q38 - Government Policy
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q28 - Government Policy
D - Microeconomics > D9 - Intertemporal Choice and Growth
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
|Depositing User:||Fridrik Baldursson|
|Date Deposited:||04. May 2009 01:16|
|Last Modified:||16. Feb 2013 20:22|
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