Scandinavian Working Papers in Economics
Memorandum,
Oslo University, Department of Economics
No 11/2009: Price Volatility and Risk Exposure: on the Interaction of Quota and Product Markets
Fridrik M. Baldursson () and Nils-Henrik M. von der Fehr ()
Additional contact information
Fridrik M. Baldursson: Reykjavik University
Nils-Henrik M. von der Fehr: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Abstract: We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is - whether it is ‘clean’ or ‘dirty’- and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, the optimal initial quota allocation turns out to resemble a grandfathering regime: clean firms are allocated no quotas - dirty firms are allocated quotas for a part of their emissions.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour.
Keywords: regulation; effluent taxes; tradable quotas; uncertainty; risk aversion; environmental management
JEL-codes: D81; H23; L51; Q28; Q38
35 pages, April 22, 2009
Full text files
Memo-11-2009.pdf
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