Logo
Munich Personal RePEc Archive

Price volatility and risk exposure: on the interaction of quota and product markets

Baldursson, Fridrik M. and Fehr, Nils-Henrik M. von der (2009): Price volatility and risk exposure: on the interaction of quota and product markets.

[thumbnail of MPRA_paper_14994.pdf]
Preview
PDF
MPRA_paper_14994.pdf

Download (362kB) | Preview

Abstract

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.

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.