Input Choice under Carbon Constraint

28 Pages Posted: 3 Dec 2010

See all articles by Alain Bousquet

Alain Bousquet

University of Toulouse 1 - Centre Interuniversitaire de Calcul de Toulouse (CICT)

Anna Creti

affiliation not provided to SSRN

Date Written: November 30, 2010

Abstract

This paper assesses the impact of emission trading on short-term input demand as well as on long-term production decisions, tacking into account uncertainty in the polluting input price and abatement by input substitution. We find that firms decisions depend on the interplay between three effects. First, the "average cost effect", due to the carbon price, causes a decrease in the input capacity with respect to a reference case where the permits market does not exist. Second, the "marginal variability effect" or the impact of price variability, which instead leads to an expansion of the installed equipment. Third, the "technology effect", i.e. the extent of substitution between polluting and clean inputs. Model simulations show that this interaction can result in weak emission reductions.

Keywords: Input demand, Uncertainty, Capacity Choice, Carbon

JEL Classification: D21, G13, Q50

Suggested Citation

Bousquet, Alain and Creti, Anna, Input Choice under Carbon Constraint (November 30, 2010). Bocconi Legal Studies Research Paper No. 40, Available at SSRN: https://ssrn.com/abstract=1718268 or http://dx.doi.org/10.2139/ssrn.1718268

Alain Bousquet (Contact Author)

University of Toulouse 1 - Centre Interuniversitaire de Calcul de Toulouse (CICT) ( email )

118, route de Narbonne
Toulouse Cedex 4, F-31062
France

Anna Creti

affiliation not provided to SSRN ( email )

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