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Type | Working Paper |
Scope | Contributions to practice |
Title | Pollution permits, Strategic Trading and Dynamic Technology Adoption |
Organization Unit | |
Authors |
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Series Name | SSRN |
Number | 1786679 |
Date | 2011 |
Abstract Text | This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can both invest in low-emitting production technologies and trade permits. In the model, technology adoption and allowance prices are generated endogenously and are inter-dependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value reflects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status. These conditions are also satised when a price support instrument (dubbed European-cash-for-permits), which is contingent on the adoption of the new technology, is introduced. Numerical investigation conrms that this policy generates a Floating price floor for the allowances, and it restores the dynamic incentives to invest. Given that this policy comes at a cost, a criterion for the selection of a self financing policy (based on convex risk measures) is proposed and implemented. |
Official URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1786679 |
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