Emission regulation: Prices, quantities and hybrids with endogenous technology choice
Working paper
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https://hdl.handle.net/11250/3075383Utgivelsesdato
2023-06Metadata
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- Discussion Papers [1002]
Sammendrag
This paper examines the investment incentives of market-based regulation, with focus on the
technology characteristics the different regulatory schemes tend to incentivize. The firms'
technology choice is socially optimal if and only if the aggregate emission allowance supply is
completely inelastic. Further, in the presence of uncertainty, elastic emission allowance supply and
strictly convex environmental damage, it is optimal to tax investment in technologies that induce
large variance in emissions. Last, price elastic supply of emission allowances may increase the
volatility in the product market, depending on the risk environment the firms face. The results
indicate that introduction of permit price stabilizing measures in an emission trading system will
come at the cost of suboptimal technology investments. It may also cause increased fluctuations in
product prices.