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Title:Price volatility and risk exposure: On the interaction of quota and product markets PDF Logo
Authors:Baldursson, Fridrik M.
von der Fehr, Nils-Henrik M.
Issue Date:2009
Series/Report no.:Memorandum // Department of Economics, University of Oslo 2009,11
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.
Subjects:regulation
effluent taxes
tradable quotas
uncertainty
risk aversion
environmental management
JEL:D81
D9
H23
L51
Q28
Q38
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

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