1,721,017 research outputs found
Emissions trading systems with cap adjustments
No full textAbstractEmissions Trading Systems (ETSs) with fixed caps lack provisions to address systematic imbalances in the supply and demand of permits due to changes in the state of the regulated economy. We propose a mechanism which adjusts the allocation of permits based on the current bank of permits. The mechanism spans the spectrum between a pure quantity instrument and a pure price instrument. We solve the firms׳ emissions control problem and obtain an explicit dependency between the key policy stringency parameter—the adjustment rate—and the firms׳ abatement and trading strategies. We present an analytical tool for selecting the optimal adjustment rate under both risk-neutrality and risk-aversion, which provides an analytical basis for the regulator׳s choice of a responsive ETS policy
Quantitative environmental economics : modeling marketable permits in discrete and continuous time
Full text linkEnvironmental policy instruments, such as marketable permits, exist to help monitor and regulate environmental practices of organizations, i.e. companies and institutions (see [60], [77] and discussion in Chapter 2). Market-based instruments are already employed for the implementation of environmental policies on European scale (European Emission Trading Scheme - EU ETS) and on global scale (Kyoto protocol). In an effort to bridge the gap between the theoretical emission permit price and observed market-price behavior, we investigate the historical time series of the marketable permit price. More precisely, in Chapter 3 we advocate the use of a new GARCH-type structure for the analysis of inherent heteroskedastic dynamics in the returns of SO2 in the U.S. and of CO2 emission permits in the EU ETS. In Chapter 4 we show that the presence of asymmetric (or incomplete) information plays a central role. In other words, market-prices of permits are affected by the different information sets based on which market-players found their financial and investment strategies. A CO2-option pricing model comparison is developed in Chapter 4.7. The option pricing method can be used for hedging purposes and for pricing CO2-linked projects and investments
Dynamic supply adjustment and banking under uncertainty in an emission trading scheme:The market stability reserve
Full text linkWe study the impact of a supply management mechanism (SMM) similar to the Market Stability Reserve proposed in 2015 which preserve the overall emissions cap and we comment on the recent cap-changing amendments. We provide an analytical description of the conditions under which an SMM alters the emissions abatement paths, affecting the expected length of the banking period and its variability. While abatement strategies of risk neutral firms solely depend on the former, for risk-averse firms changes in the latter would lead to higher risk premia, accelerated depletion of the bank and, consequently, further reduction of abatement and allowance prices. Cancellation of part of the reserve could partially outweigh the effect on risk premia sustaining allowance prices.</p
Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets, Working Paper no. 276 of the Centre for Climate Change Economics and Policy, working paper no. 246 of the Grantham Research Institute on Climate Change and the Environment, p. 1-41
No full textWe investigate the combined effect of an Emission Trading System (ETS) and renewable energy sources on electricity generation investment in energy-only markets. We propose a simple representation of the capacity expansion decision between fossil fuel and renewable production, where electricity demand is uncertain. Increasing renewable capacity creates a tradeoff for large electricity producers: a higher share of renewable production can be priced at the higher marginal cost of fossil fuel production, yet the likelihood of achieving higher profits is reduced because more demand is met by cheaper renewable production. A numerical application of the model shows that producers prefer withholding investments in renewable energy sources, calling into question the long-term efficacy of an ETS in achieving decarbonisation goals
Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies
No full textThis paper examines the investment strategies of compliance companies in irreversible abatement technologies and the environmental achievements of the system in an inter-temporal cap-and-trade market using laboratory experiments. The experimental analysis is performed under varying market structures: firstly, in a market that is exclusive to compliance companies and subsequently, in a market that is open to both compliance and non-compliance entities. In line with theoretical models on irreversible abatement investment, the paper shows that regulated companies trade permits at a premium. Also, steep per unit penalties for excess emissions prompt early investments in irreversible abatement technologies. Further, the paper shows that by contributing to the permit demand and supply, non-compliance companies (i) enhance the exchange of permits, helping the system to achieve a zero-excess permit position, (ii) increase the price levels, but has no apparent effect on price variability
Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets
No full textWe investigate the combined effect of an Emission Trading System (ETS) and renewable energy sources on electricity generation investment in energy-only markets. We propose a simple representation of the capacity expansion decision between fossil fuel and renewable production, where electricity demand is uncertain. Increasing renewable capacity creates a tradeoff for large electricity producers: a higher share of renewable production can be priced at the higher marginal cost of fossil fuel production, yet the likelihood of achieving higher profits is reduced because more demand is met by cheaper renewable production. A numerical application of the model shows that producers prefer withholding investments in renewable energy sources, calling into question the long-term efficacy of an ETS in achieving decarbonisation goals
The endogenous price dynamics of emission allowances and an application to CO2 option pricing
Full text linkMarket mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, and the European Emission Trading Scheme is an example. By means of dynamic optimization in the contest of firms covered by such environmental regulations, this paper generates endogenously the price dynamics of emission permits under asymmetric information, allowing inter-temporal banking and borrowing. In the market there are a finite number of firms and each firm’s pollution emission follows an exogenously given stochastic process. We prove the discounted permit price is a martingale with respect to the relevant filtration. The model is solved numerically. Finally, a closed-form pricing formula for European-style options is derived
Cap-and-trade properties under different hybrid scheme designs
Full text linkThis paper examines the key design mechanisms of existing and proposed cap-and-trade markets. First, it is shown that the hybrid systems under investigation (safety-valve with offsets, price floor using a subsidy, price collar, allowance reserve, and options offered by the regulator) can be decomposed into a combination of an ordinary cap-and-trade scheme with European or American-style call and put options. Then, we quantify and discuss the advantages and disadvantages of the proposed hybrid schemes by investigating whether pre-set objectives (enforcement of permit price bounds and reduction of potential costs for relevant companies) can be accomplished while maintaining the original environmental targets
Environmental Finance and Investments
No full textThe current economic and environmental situation poses fundamental questions that this book aims to answer: Under which conditions could a market-based approach contribute to a decrease in emissions? How are abatement and investment strategies generated or promoted under permit regimes like the European Union Emission Trading Scheme (EU ETS)? In the context of the EU ETS, what is the trade-off between production, technological changes and pollution? This book is intended to provide students and practitioners the knowledge and theoretical tools they need in order to answer these and other more general questions in the context of so-called environmental finance theory, a new field of research that investigates the economic, financial and managerial impacts of market-based environmental policies
The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity
Full text linkRecent literature showed that the choice between a price or quantity control depends, in part, on the dynamic structure of cost uncertainty. Temporary shocks to abatement cost favors the use of a price control, while permanent shocks favor a quantity control. Unfortunately, the importance of this assumption to the optimal choice has not yet received wide attention among economists. We analyze the regulatory problem in an alternative setting and reproduce these results. Our contribution is the simplicity of the model and the accessibility of the results, which reinforce the critical role played by the assumed structure of uncertainty.MIT Center for Energy and Environmental Policy ResearchMassachusetts Institute of Technology. Joint Program on the Science & Policy of Global ChangeDoris Duke Charitable Foundatio
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