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Bankable Pollution Permits Under Uncertainty and Optimal Risk Management Rules: Theory and Empirical Evidence

EconomiX Working Paper No. 2008-25

Posted: 2 Dec 2008  

Julien Chevallier

University of Paris 8 Vincennes-Saint Denis

Pierre-André Jouvet

Université Paris X Nanterre - Department of Economics

Johanna Etner

Université Paris V Rene Descartes

Date Written: December 2, 2008

Abstract

The well known economic advantage of tradable permits over command and control obviously vanishes if firms do not trade because of regulatory uncertainty. In fact, uncertainty about political decision changes in the permits program could make firms reluctant to participate in tradable permits markets. Based on a two-period partial equilibrium framework, our results suggest that the banking provisions may be used as a tool of policy risk control and that it is possible to define optimal risk sharing rules in order to respond to political decision changes. Finally, our empirical discussion attempts to put the theoretical results concerning firms' banking and pooling behaviors in the context of the recent development of the European Union Emisions Trading scheme (EU ETS).

Keywords: Firm behavior, Tradable permits, Policy risk, EU ETS

JEL Classification: D21, D80, Q58

Suggested Citation

Chevallier, Julien and Jouvet, Pierre-André and Etner, Johanna, Bankable Pollution Permits Under Uncertainty and Optimal Risk Management Rules: Theory and Empirical Evidence (December 2, 2008). EconomiX Working Paper No. 2008-25. Available at SSRN: https://ssrn.com/abstract=1310218

Julien Chevallier (Contact Author)

University of Paris 8 Vincennes-Saint Denis ( email )

Paris
France

Pierre-André Jouvet

Université Paris X Nanterre - Department of Economics ( email )

Nanterre Cedex, 92001
France

Johanna Etner

Université Paris V Rene Descartes ( email )

31, avenue Bosquet
Paris, 75270
France

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