Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

The present paper analyzes the investment effects of emission trading scheme (ETS) when emission permits are bankable and there is technological uncertainty with regard to the abatement cost. A real option model is employed to accommodate irreversibility of investment and cost uncertainty. In the absence of abatement cost uncertainty, a bankable ETS reduces a firm's incentive for environmental investment, because the firm can utilize the banked permits for future compliance which act as substitutes for abatement investment. However, when cost uncertainty is prevalent, investment may reduce the opportunity cost of irreversible investment under the banking system, thereby increasing a firm's investment incentive. The condition is derived under which a bankable ETS provides higher investment incentives than a non-bankable ETS does.

Original languageEnglish
Pages (from-to)1314-1321
Number of pages8
JournalEconomic Modelling
Volume29
Issue number4
DOIs
Publication statusPublished - 2012 Jul 1

Fingerprint

Cost uncertainty
Banking
Real options analysis
Abatement costs
Emission permits
Emissions trading scheme
Investment incentives
Environmental investment
Irreversibility
Abatement
Firm investment
Real options
Substitute
Technological uncertainty
Irreversible investment
Banking system
Opportunity cost
Incentives

Keywords

  • Banking
  • Emission permit
  • Investment
  • Real option

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty. / Park, Hojeong.

In: Economic Modelling, Vol. 29, No. 4, 01.07.2012, p. 1314-1321.

Research output: Contribution to journalArticle

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