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...

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Main Authors:	Zhang, Fan, Huang, Tao
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2015
Subjects:	ALLOWANCE TOTAL EMISSIONS ALLOCATION OF ALLOWANCES UNCERTAINTIES PUBLIC UTILITIES SUBSTITUTION POWER PLANTS ENERGY MARKETS PLANT PERFORMANCE HIGH‐ SULFUR COAL RELATIVE PRICE CARBON DIOXIDE PUBLIC ECONOMICS PRICE OF ALLOWANCES PRICE OF ELECTRICITY CARBON NITROGEN OXIDES MARGINAL COST INTEREST RATE EMISSIONS EXTREME SCENARIOS REVENUES HIGH‐SULFUR COAL PRICE CLEAN AIR ACT NOX MARGINAL ABATEMENT AIR ANNUAL CAP EMISSION PERMITS CLEAN AIR PROBABILITY DISTRIBUTION EMISSIONS ABATEMENT ECONOMIC ANALYSIS ENERGY INFORMATION ADMINISTRATION ELECTRIC UTILITIES CO2 TRADE SYSTEM ALLOWANCE ALLOCATION INVESTMENT BEHAVIOR SCENARIOS DEMAND ELASTICITY PRICE VOLATILITY OXIDES SULFUR COAL SURPLUS OF ALLOWANCES MARKETS POLLUTION EMISSION TRADING PRODUCT ENVIRONMENTAL ECONOMICS LOW‐SULFUR COAL AMOUNT OF EMISSIONS FUELS FUEL COSTS SULFUR ABATEMENT COST ALLOWANCE PRICE PRICE CHANGE MARKET INTEREST RATE MARKET OUTCOMES PERMIT TRADING REGULATORY POLICIES EMISSION HEAT ENVIRONMENTAL POLICY POLICIES CARBON TRADING UTILITIES COST OF ALLOWANCES VALUE POWER ELECTRICITY COAL COMBUSTION CLIMATE DEMAND SULFUR COALS ABATEMENT POLLUTANTS MARGINAL ABATEMENT COST FUEL MARKET ALLOWANCE PRICES TRANSACTION COSTS SPOT MARKET MARKET ECONOMIC THEORY ABATEMENT COSTS POLICY EMISSIONS ALLOWANCES ALLOWANCES ELECTRICITY PRICES ENVIRONMENTAL EMISSIONS ALLOWANCE TRADING PROBABILITY DENSITY CARBON PRICES COMBUSTION INVESTMENT NITROGEN COALS VALUE OF ALLOWANCES COAL ALLOCATION ENERGY ECONOMICS TRANSACTIONS COSTS FUEL EMISSIONS PERMIT PRICES RAIN LESS ENVIRONMENTAL REGULATION POLLUTION CONTROL SULFUR DIOXIDE SULFUR CONTENT INVESTMENTS SO2 CLIMATE POLICY PRICE OF COAL RISK AVERSION ACID RAIN SCRUBBERS CAP‐AND‐TRADE SYSTEMS ALLOWANCE ALLOCATIONS ACID PRICES APPROACH ELECTRICITY MARKETS BENEFITS LAND ECONOMICS COAL PROPERTIES ENERGY
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

id	okr-10986-22220
recordtype	oai_dc
spelling	okr-10986-222202021-04-23T14:04:07Z Rate of Return Regulation and Emission Permits Trading under Uncertainty Zhang, Fan Huang, Tao ALLOWANCE TOTAL EMISSIONS ALLOCATION OF ALLOWANCES UNCERTAINTIES PUBLIC UTILITIES SUBSTITUTION POWER PLANTS ENERGY MARKETS PLANT PERFORMANCE HIGH‐ SULFUR COAL RELATIVE PRICE CARBON DIOXIDE PUBLIC ECONOMICS PRICE OF ALLOWANCES PRICE OF ELECTRICITY CARBON NITROGEN OXIDES MARGINAL COST INTEREST RATE EMISSIONS EXTREME SCENARIOS REVENUES HIGH‐SULFUR COAL PRICE CLEAN AIR ACT NOX MARGINAL ABATEMENT AIR ANNUAL CAP EMISSION PERMITS CLEAN AIR PROBABILITY DISTRIBUTION EMISSIONS ABATEMENT ECONOMIC ANALYSIS ENERGY INFORMATION ADMINISTRATION ELECTRIC UTILITIES CO2 TRADE SYSTEM ALLOWANCE ALLOCATION INVESTMENT BEHAVIOR SCENARIOS DEMAND ELASTICITY PRICE VOLATILITY OXIDES SULFUR COAL SURPLUS OF ALLOWANCES MARKETS POLLUTION EMISSION TRADING PRODUCT ENVIRONMENTAL ECONOMICS LOW‐SULFUR COAL AMOUNT OF EMISSIONS FUELS FUEL COSTS SULFUR ABATEMENT COST ALLOWANCE PRICE PRICE CHANGE MARKET INTEREST RATE MARKET OUTCOMES PERMIT TRADING REGULATORY POLICIES EMISSION HEAT ENVIRONMENTAL POLICY POLICIES CARBON TRADING UTILITIES COST OF ALLOWANCES VALUE POWER ELECTRICITY COAL COMBUSTION CLIMATE DEMAND SULFUR COALS ABATEMENT POLLUTANTS MARGINAL ABATEMENT COST FUEL MARKET ALLOWANCE PRICES TRANSACTION COSTS SPOT MARKET MARKET ECONOMIC THEORY ABATEMENT COSTS POLICY EMISSIONS ALLOWANCES ALLOWANCES ELECTRICITY PRICES ENVIRONMENTAL EMISSIONS ALLOWANCE TRADING PROBABILITY DENSITY CARBON PRICES COMBUSTION INVESTMENT NITROGEN COALS VALUE OF ALLOWANCES COAL ALLOCATION ENERGY ECONOMICS TRANSACTIONS COSTS FUEL EMISSIONS PERMIT PRICES RAIN LESS ENVIRONMENTAL REGULATION POLLUTION CONTROL SULFUR DIOXIDE SULFUR CONTENT INVESTMENTS SO2 CLIMATE POLICY PRICE OF COAL RISK AVERSION ACID RAIN SCRUBBERS CAP‐AND‐TRADE SYSTEMS ALLOWANCE ALLOCATIONS ACID PRICES APPROACH ELECTRICITY MARKETS BENEFITS LAND ECONOMICS COAL PROPERTIES ENERGY 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. 2015-07-17T19:37:34Z 2015-07-17T19:37:34Z 2015-06 Working Paper http://documents.worldbank.org/curated/en/2015/06/24714547/rate-return-regulation-emission-permits-trading-under-uncertainty http://hdl.handle.net/10986/22220 English en_US Policy Research Working Paper;No. 7343 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	ALLOWANCE TOTAL EMISSIONS ALLOCATION OF ALLOWANCES UNCERTAINTIES PUBLIC UTILITIES SUBSTITUTION POWER PLANTS ENERGY MARKETS PLANT PERFORMANCE HIGH‐ SULFUR COAL RELATIVE PRICE CARBON DIOXIDE PUBLIC ECONOMICS PRICE OF ALLOWANCES PRICE OF ELECTRICITY CARBON NITROGEN OXIDES MARGINAL COST INTEREST RATE EMISSIONS EXTREME SCENARIOS REVENUES HIGH‐SULFUR COAL PRICE CLEAN AIR ACT NOX MARGINAL ABATEMENT AIR ANNUAL CAP EMISSION PERMITS CLEAN AIR PROBABILITY DISTRIBUTION EMISSIONS ABATEMENT ECONOMIC ANALYSIS ENERGY INFORMATION ADMINISTRATION ELECTRIC UTILITIES CO2 TRADE SYSTEM ALLOWANCE ALLOCATION INVESTMENT BEHAVIOR SCENARIOS DEMAND ELASTICITY PRICE VOLATILITY OXIDES SULFUR COAL SURPLUS OF ALLOWANCES MARKETS POLLUTION EMISSION TRADING PRODUCT ENVIRONMENTAL ECONOMICS LOW‐SULFUR COAL AMOUNT OF EMISSIONS FUELS FUEL COSTS SULFUR ABATEMENT COST ALLOWANCE PRICE PRICE CHANGE MARKET INTEREST RATE MARKET OUTCOMES PERMIT TRADING REGULATORY POLICIES EMISSION HEAT ENVIRONMENTAL POLICY POLICIES CARBON TRADING UTILITIES COST OF ALLOWANCES VALUE POWER ELECTRICITY COAL COMBUSTION CLIMATE DEMAND SULFUR COALS ABATEMENT POLLUTANTS MARGINAL ABATEMENT COST FUEL MARKET ALLOWANCE PRICES TRANSACTION COSTS SPOT MARKET MARKET ECONOMIC THEORY ABATEMENT COSTS POLICY EMISSIONS ALLOWANCES ALLOWANCES ELECTRICITY PRICES ENVIRONMENTAL EMISSIONS ALLOWANCE TRADING PROBABILITY DENSITY CARBON PRICES COMBUSTION INVESTMENT NITROGEN COALS VALUE OF ALLOWANCES COAL ALLOCATION ENERGY ECONOMICS TRANSACTIONS COSTS FUEL EMISSIONS PERMIT PRICES RAIN LESS ENVIRONMENTAL REGULATION POLLUTION CONTROL SULFUR DIOXIDE SULFUR CONTENT INVESTMENTS SO2 CLIMATE POLICY PRICE OF COAL RISK AVERSION ACID RAIN SCRUBBERS CAP‐AND‐TRADE SYSTEMS ALLOWANCE ALLOCATIONS ACID PRICES APPROACH ELECTRICITY MARKETS BENEFITS LAND ECONOMICS COAL PROPERTIES ENERGY
spellingShingle	ALLOWANCE TOTAL EMISSIONS ALLOCATION OF ALLOWANCES UNCERTAINTIES PUBLIC UTILITIES SUBSTITUTION POWER PLANTS ENERGY MARKETS PLANT PERFORMANCE HIGH‐ SULFUR COAL RELATIVE PRICE CARBON DIOXIDE PUBLIC ECONOMICS PRICE OF ALLOWANCES PRICE OF ELECTRICITY CARBON NITROGEN OXIDES MARGINAL COST INTEREST RATE EMISSIONS EXTREME SCENARIOS REVENUES HIGH‐SULFUR COAL PRICE CLEAN AIR ACT NOX MARGINAL ABATEMENT AIR ANNUAL CAP EMISSION PERMITS CLEAN AIR PROBABILITY DISTRIBUTION EMISSIONS ABATEMENT ECONOMIC ANALYSIS ENERGY INFORMATION ADMINISTRATION ELECTRIC UTILITIES CO2 TRADE SYSTEM ALLOWANCE ALLOCATION INVESTMENT BEHAVIOR SCENARIOS DEMAND ELASTICITY PRICE VOLATILITY OXIDES SULFUR COAL SURPLUS OF ALLOWANCES MARKETS POLLUTION EMISSION TRADING PRODUCT ENVIRONMENTAL ECONOMICS LOW‐SULFUR COAL AMOUNT OF EMISSIONS FUELS FUEL COSTS SULFUR ABATEMENT COST ALLOWANCE PRICE PRICE CHANGE MARKET INTEREST RATE MARKET OUTCOMES PERMIT TRADING REGULATORY POLICIES EMISSION HEAT ENVIRONMENTAL POLICY POLICIES CARBON TRADING UTILITIES COST OF ALLOWANCES VALUE POWER ELECTRICITY COAL COMBUSTION CLIMATE DEMAND SULFUR COALS ABATEMENT POLLUTANTS MARGINAL ABATEMENT COST FUEL MARKET ALLOWANCE PRICES TRANSACTION COSTS SPOT MARKET MARKET ECONOMIC THEORY ABATEMENT COSTS POLICY EMISSIONS ALLOWANCES ALLOWANCES ELECTRICITY PRICES ENVIRONMENTAL EMISSIONS ALLOWANCE TRADING PROBABILITY DENSITY CARBON PRICES COMBUSTION INVESTMENT NITROGEN COALS VALUE OF ALLOWANCES COAL ALLOCATION ENERGY ECONOMICS TRANSACTIONS COSTS FUEL EMISSIONS PERMIT PRICES RAIN LESS ENVIRONMENTAL REGULATION POLLUTION CONTROL SULFUR DIOXIDE SULFUR CONTENT INVESTMENTS SO2 CLIMATE POLICY PRICE OF COAL RISK AVERSION ACID RAIN SCRUBBERS CAP‐AND‐TRADE SYSTEMS ALLOWANCE ALLOCATIONS ACID PRICES APPROACH ELECTRICITY MARKETS BENEFITS LAND ECONOMICS COAL PROPERTIES ENERGY Zhang, Fan Huang, Tao Rate of Return Regulation and Emission Permits Trading under Uncertainty
relation	Policy Research Working Paper;No. 7343
description	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.
format	Working Paper
author	Zhang, Fan Huang, Tao
author_facet	Zhang, Fan Huang, Tao
author_sort	Zhang, Fan
title	Rate of Return Regulation and Emission Permits Trading under Uncertainty
title_short	Rate of Return Regulation and Emission Permits Trading under Uncertainty
title_full	Rate of Return Regulation and Emission Permits Trading under Uncertainty
title_fullStr	Rate of Return Regulation and Emission Permits Trading under Uncertainty
title_full_unstemmed	Rate of Return Regulation and Emission Permits Trading under Uncertainty
title_sort	rate of return regulation and emission permits trading under uncertainty
publisher	World Bank, Washington, DC
publishDate	2015
url	http://documents.worldbank.org/curated/en/2015/06/24714547/rate-return-regulation-emission-permits-trading-under-uncertainty http://hdl.handle.net/10986/22220
_version_	1764450458814906368

Rate of Return Regulation and Emission Permits Trading under Uncertainty

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