The Economics of Pollution Trading and Pricing under Regulatory Uncertainty
In this paper, authors explore the effects of uncertainty on pricing of pollution permits, through the use of a dynamic model of pollution markets. Authors consider two major sources of uncertainty - that arising from the volatility of demand for t...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/234491468061732523/The-economics-of-pollution-trading-and-pricing-under-regulatory-uncertainty http://hdl.handle.net/10986/27359 |
| Summary: | In this paper, authors explore the
effects of uncertainty on pricing of pollution permits,
through the use of a dynamic model of pollution markets.
Authors consider two major sources of uncertainty - that
arising from the volatility of demand for the underlying
resource and that coming from the regulatory environment.
Both sources of uncertainty are common in pollution permit
trading as not only does the market respond to the
volatility of fundamentals but also to the vagaries of the
institutional structure, created by public policy and
enforced through regulation. The paper shows that even in
the presence of strategic behavior on the part of the agents
involved, the trading of permits effectively reduces
emissions, and pricing does reflect opportunity costs and
environmental objectives. Furthermore, and somewhat
paradoxically, the higher uncertainty, the greater the
impact of regulation. |
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