Rate of Return Regulation and Emission Permits Trading under Uncertainty / Zhang, Fan.
This paper analyzes the dynamic effects of rate-of-return regulation on firms'emissions compliance behavior when the price of emissions permits is uncertain. The paper shows that uncertainty regarding the price of permits would motivate a regulated firm to adopt a more self-sufficient strategy...
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| Online Access: |
Full Text (via Open Knowledge Repository) |
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| Format: | Electronic eBook |
| Language: | English |
| Published: |
Washington, D.C. :
The World Bank,
2015.
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| Series: | Policy research working papers.
World Bank e-Library. |
| Subjects: |
| Summary: | This paper analyzes the dynamic effects of rate-of-return regulation on firms'emissions compliance behavior when the price of emissions permits is uncertain. The paper shows that uncertainty regarding the price of permits would motivate a regulated firm to adopt a more self-sufficient strategy and would reduce the cost-effectiveness of emission allowance trading. When allowance transactions are treated as capital investments, uncertainty could reverse the classic Averch-Johnson effect, so that a regulated firm would purchase fewer permits in the ex ante period than its unregulated counterpart. These results are driven by the asymmetric impact of a price change on the expected marginal value of allowances under rate-of-return regulation. A wider variation in the permit price and a decline in the regulated rate of return would amplify the asymmetry. These results have implications for the efficiency of the proposed global carbon trading system. |
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| Physical Description: | 1 online resource (31 pages). |