Pollution Permits, Strategic Trading and Dynamic Technology Adoption

28 Pages Posted: 18 Mar 2011

See all articles by Santiago Moreno-Bromberg

Santiago Moreno-Bromberg

University of Zurich - Department of Banking and Finance

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

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Date Written: March 15, 2011

Abstract

This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can invest both in low-emitting production technologies and trade permits. In the model, technology adoption and allowance price are generated endogenously and are inter-dependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value reflects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status. These conditions are also satisfied when a price support instrument, which is contingent on the adoption of the new technology, is introduced. Numerical investigation confirms that this policy generates a floating price floor for the allowances, and it restores the dynamic incentives to invest. Given that this policy comes at a cost, a criterion for the selection of a self-financing policy (based on convex risk measures) is proposed and implemented.

Keywords: Dynamic regulation, Emission permits, Environment, Self–financing policy, Technology adoption

JEL Classification: D8, H2, L5, Q5

Suggested Citation

Moreno-Bromberg, Santiago and Taschini, Luca, Pollution Permits, Strategic Trading and Dynamic Technology Adoption (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786679 or http://dx.doi.org/10.2139/ssrn.1786679

Santiago Moreno-Bromberg

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Luca Taschini (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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