Pollution permits, strategic trading and dynamic technology adoption

Santiago Moreno-Bromberg and Luca Taschini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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 invest both in low-emitting production technologies and trade permits. In the model, technology adoption and allowance price are generated endogenously and are interdependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value rejects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status. These conditions are also satisfied when a price support instrument, which is contingent on the adoption of the new technology, is introduced. Numerical investigation confirms 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.

Keywords: dynamic regulation; emission permits; environment; self-financing policy; technology adoption (search for similar items in EconPapers)
JEL-codes: D8 H2 L5 Q5 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2011-04-28
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://eprints.lse.ac.uk/37581/ Open access version. (application/pdf)

Related works:
Working Paper: Pollution permits, Strategic Trading and Dynamic Technology Adoption (2011)
Working Paper: Pollution Permits, Strategic Trading and Dynamic Technology Adoption (2011)
Working Paper: Pollution permits, strategic trading and dynamic technology adoption (2011)
Working Paper: Pollution permits, strategic trading and dynamic technology adoption (2011)
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