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Modeling the impact of uncertainty in emissions trading markets with bankable permits

Zhang, Yongliang, Zhang, Bing, Bi, Jun and He, Pan 2013. Modeling the impact of uncertainty in emissions trading markets with bankable permits. Frontiers of Environmental Science and Engineering 7 (2) , pp. 231-241. 10.1007/s11783-012-0431-x

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The various forms of uncertainty that firms may face in bankable emission permit trading markets will affect firms’ decision making as well as their market performance. This research explores the effect of increased uncertainty over future input costs and output prices on the temporal distribution of emission. In a dynamic programming setting, the permit price is a convex function of stochastic prices of coal and electricity. Increased uncertainty about future market conditions increases the expected permit price and causes a risk neutral firm to reduce ex ante emissions in order to smooth out marginal abatement costs over time. Finally, safety valves, both low-side and high-side, are suggested to reduce the impact of uncertainty in bankable emission trading markets.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Earth and Environmental Sciences
Publisher: Springer
ISSN: 2095-221X
Date of Acceptance: 18 November 2011
Last Modified: 06 Aug 2020 11:00

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