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http://dx.doi.org/10.15266/KEREA.2016.25.3.403

The Impacts of Decision Order and Uncertainty on Emissions Trading  

Moon, Jin-Young (Korea Institute for International Economic Policy)
Publication Information
Environmental and Resource Economics Review / v.25, no.3, 2016 , pp. 403-419 More about this Journal
Abstract
Cap-and-trade policies that allow firms to trade emission allowances are designed to reduce emissions at least cost and are shown to be efficient when there is no uncertainty over emissions. This paper examines how uncertainty in emissions affects firms' decisions about permit purchase and abatement. The results show that whether firms abate more under uncertainty compared to a case with no uncertainty depends on the expected penalty cost and marginal abatement cost. If the expected marginal penalty cost is greater than the marginal abatement cost, the firm will choose to reduce emissions and abate more under uncertainty. When the expected marginal penalty is greater than the marginal cost of abatement, increases in uncertainty result in reduced emissions. This paper also examines whether the order of abatement and permit trading and the realization of uncertainty affect firms' decisions. The results show that total expected emissions are the same regardless of the order of moves.
Keywords
Emissions trading; Uncertainty; Permits;
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