The Environmental Option
University of Pennsylvania Law School; Bar Ilan University - Faculty of Law
University of Arizona - James E. Rogers College of Law
January 17, 2013
CERE Working Paper, 3/2013
U of Penn, Inst for Law & Econ Research Paper No. 13-12
University of Oslo Faculty of Law Research Paper No. 2013-31
We introduce an innovative market-based mechanism that may be used to advance environmental goals. Our mechanism employs option theory to give established businesses a financial stake in the success of green technologies. We show why and how green companies should be given an option to transfer a block of their shares to any corporation of their choice, incentivize them to switch to environmentally friendly technologies and to use their political clout to alleviate legal, regulatory and political barriers to the adoption of such technologies. In short, giving established corporations a stake in green companies will give them a stake in the environment. Specifically, we propose enacting legislation that will empower green companies that meet certain conditions to transfer a call option to buy a block of its shares to an established company of their choice. The option will be given for free; the established company that receives the option will not have to pay anything for it initially. The exercise price will be the price of the green company’s share at the time of the transfer and the receiving company will have a period of five years to exercise. We call this mechanism the “environmental option.” From a legal standpoint, the mechanism we propose is not unprecedented, so our proposed scheme is not overtly intrusive, nor should it be very controversial. Furthermore, we believe that this risk is worth taking given the proposal’s potential upside.
Number of Pages in PDF File: 45
Keywords: Environmental Regulation, Options, Technological Growth, Public Choice, Ecological Policies, Green Technologies, Innovation, Diffusion, Implementation, Mechanism Design
JEL Classification: K32, O31, O38, Q28working papers series
Date posted: March 15, 2013 ; Last revised: November 4, 2013
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