Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-25T10:15:52.197Z Has data issue: false hasContentIssue false
  • English
  • Français

Environmental protection, public finance requirements and the timing of emission reductions

Published online by Cambridge University Press:  19 September 2012

Elettra Agliardi  and
Luigi Sereno
Elettra Agliardi
Affiliation:
Department of Economics, University of Bologna and Rimini Center for Economic Analysis, Piazza Scaravilli 2, 40126 Bologna, Italy. Email: [email protected]
Luigi Sereno
Affiliation:
Department of Economics, University of Bologna, Piazza Scaravilli 2, 40126 Bologna, Italy. Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The effects of four environmental policy options for the reduction of pollution emissions, i.e. taxes, emission standards, auctioned permits and freely allocated permits, are analyzed. The setup is a real option model where the amount of emissions is determined by solving the firm's profit maximization problem under each policy instrument. The regulator solves an optimal stopping problem in order to find the critical threshold for policy adoptions taking into account revenues from taxes and auctioned permits and government spending. In this framework we find the ranking of the alternative policy options in terms of their adoption lag and social welfare. We show that when the output demand is elastic, emission standards are preferred to freely allocated permits. Taxes and auctioned permits are always equivalent in terms of their adoption lag and social welfare, and also equivalent to emission standards when the regulator redistributes revenues.

Type
Research Article
Information
Environment and Development Economics , Volume 17 , Issue 6 , December 2012 , pp. 715 - 739
Copyright
Copyright © Cambridge University Press 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Agliardi, E. (2011), ‘Sustainability in uncertain economies’, Environmental and Resource Economics 48: 71–82.CrossRefGoogle Scholar
Agliardi, E. and Sereno, L. (2011), ‘The effects of environmental taxes and quotas on the optimal timing of emission reductions under Choquet–Brownian uncertainty’, Economic Modelling 28: 2793–2802.CrossRefGoogle Scholar
Balikcioglu, M., Fackler, P.L., and Pindyck, R.S. (2011), ‘Solving optimal timing problems in environmental economics’, Resource and Energy Economics 33: 761–768.CrossRefGoogle Scholar
Conrad, J.M. (1997), ‘Global warming: when to bite the bullet’, Land Economics 73: 164–173.CrossRefGoogle Scholar
Conrad, J.M. (2000), ‘Wilderness: options to preserve, extract or develop’, Resource and Energy Economics 22: 205–219.CrossRefGoogle Scholar
Coria, J. (2009), ‘Taxes, permits and the diffusion of a new technology’, Resource and Energy Economics 31: 249–271.CrossRefGoogle Scholar
Dixit, A.K. and Pindyck, R.S. (1994), Investment Under Uncertainty, Princeton: Princeton University Press.CrossRefGoogle Scholar
Fisher, A.C. (2000), ‘Investment under uncertainty and option value in environmental economics’, Resource and Energy Economics 22: 197–204.CrossRefGoogle Scholar
Framstad, N.C. (2011), ‘A remark on R.S. Pindyck: “Irreversibilities and the timing of environmental policy”’, Resource and Energy Economics 33: 756–760.CrossRefGoogle Scholar
Insley, M. (2003), ‘On the option to invest in pollution control under a regime of tradable emissions allowances’, Canadian Journal of Economics 36: 860–883.CrossRefGoogle Scholar
Montero, J.P. (2002a), ‘Market structure and environmental innovation’, Journal of Applied Economics 5: 293–325.CrossRefGoogle Scholar
Montero, J.P. (2002b), ‘Permits, standards, and technology innovation’, Journal of Environmental Economics and Management 44: 23–44.CrossRefGoogle Scholar
Nishide, K. and Ohyama, A. (2009), ‘Using real options theory to a country's environmental policy: considering the economic size and growth’, Operational Research: An International Journal 9: 229–250.CrossRefGoogle Scholar
Ohyama, A. and Tsujimura, M. (2006), ‘Political measures for strategic environmental policy with external effects’, Environmental and Resource Economics 35: 109–135.CrossRefGoogle Scholar
Phaneuf, D.J. and Requate, T. (2002), ‘Incentives for investment in advanced pollution abatement technology in emission permit markets with banking’, Environmental and Resource Economics 22: 369–390.CrossRefGoogle Scholar
Pindyck, R.S. (2000), ‘Irreversibilities and the timing of environmental policy’, Resource and Energy Economics 22: 223–259.CrossRefGoogle Scholar
Pindyck, R.S. (2002), ‘Optimal timing problems in environmental economics’, Journal of Economic Dynamics and Control 26: 1677–1697.CrossRefGoogle Scholar
Requate, T. (2005), ‘The Dixit–Pindyck and the Arrow–Fisher–Hanemann–Henry option values are not equivalent: a note on Fisher (2000)’, Resource and Energy Economics 27: 83–88.Google Scholar
Saltari, E. and Travaglini, G. (2011), ‘The effects of environmental policies on the abatement investment decisions of a green firm’, Resource and Energy Economics 33: 666–685.CrossRefGoogle Scholar
Saphores, J.D.M. and Carr, P. (2000), ‘Real options and the timing of implementation of emission limits under ecological uncertainty’, in Brennan, M.J. and Trigeorgis, L. (eds), Project Flexibility, Agency and Competition. New Developments in the Theory and Applications of Real Options, Oxford: Oxford University Press, pp. 254–271.Google Scholar
Van Soest, D. (2005), ‘The impact of environmental policy instruments on the timing of adoption of energy-saving technologies’, Resource and Energy Economics 27: 235–247.CrossRefGoogle Scholar
Wirl, F. (2006), ‘Consequences of irreversibilities on optimal intertemporal CO 2 emission policies under uncertainty’, Resource and Energy Economics 28: 105–123.CrossRefGoogle Scholar
Xepapadeas, A. (2001), ‘Environmental policy and firm behavior: abatement investment and location decisions under uncertainty and irreversibility’, in Carraro, C. and Metcalf, G. (eds), Behavioral and Distributional Effects of Environmental Policy, Chicago: University of Chicago Press, pp. 281–308.CrossRefGoogle Scholar
Supplementary material: PDF

Agliardi Supplementary Material

Appendix

Download Agliardi Supplementary Material(PDF)
PDF 121 KB