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Library Rate of Return Regulation and Emission Permits Trading under Uncertainty

Rate of Return Regulation and Emission Permits Trading under Uncertainty

Rate of Return Regulation and Emission Permits Trading under Uncertainty

Resource information

Date of publication
июля 2015
Resource Language
ISBN / Resource ID
oai:openknowledge.worldbank.org:10986/22220

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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Authors and Publishers

Author(s), editor(s), contributor(s)

Zhang, Fan
Huang, Tao

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