Rate of Return Regulation and Emission Permits Trading under Uncertainty
This paper analyzes the dynamic effects of rate-of-return regulation on firms’ emissions compliance behavior when the price of emissions permits is uncertain. The paper shows that uncertainty regarding the price of permits would motivate a regulate...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/06/24714547/rate-return-regulation-emission-permits-trading-under-uncertainty http://hdl.handle.net/10986/22220 |
| Summary: | This paper analyzes the dynamic effects
of rate-of-return regulation on firms’ emissions compliance
behavior when the price of emissions permits is uncertain.
The paper shows that uncertainty regarding the price of
permits would motivate a regulated firm to adopt a more
self-sufficient strategy and would reduce the
cost-effectiveness of emission allowance trading. When
allowance transactions are treated as capital investments,
uncertainty could reverse the classic Averch-Johnson effect,
so that a regulated firm would purchase fewer permits in the
ex ante period than its unregulated counterpart. These
results are driven by the asymmetric impact of a price
change on the expected marginal value of allowances under
rate-of-return regulation. A wider variation in the permit
price and a decline in the regulated rate of return would
amplify the asymmetry. These results have implications for
the efficiency of the proposed global carbon trading system. |
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