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The Impact of Uncertainty on Banking Behavior: Evidence from the US Sulfur Dioxide Emissions Allowance Trading Program

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Accounting for Climate Change

Abstract

In this paper, we study empirically whether uncertainty has an influence on trade in the US sulfur dioxide allowances market. In particular, we investigate the role of uncertainty on banking behavior. To do this, we introduce a tractable, structural model of trading permits under uncertainty. The model establishes a relation between banking behavior and risk preferences, especially prudence in the Kimball (1990) sense. We then test this model using data on allowances, for utilities submitted to the US Environmental Protection Agency’s Acid Rain Program, carried over from one year to the next. Evidence is found of imprudence, namely, utilities bank permits in order to favor higher profits. Another finding is that larger utilities do not adopt behavior significantly different from that of smaller ones.

This paper was presented at the “International Workshop on Uncertainty in Greenhouse Gas Inventories: Verification, Compliance & Trading” in Warsaw, Poland, September 2004, under the title “Portfolio Management of Emissions Permits and Prudence Behavior.”

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Authors and Affiliations

  1. Centre de Recherche en Économie et Droit de l’Énergie, Faculté des Sciences Economiques, Université Montpellier I, Av. de la Mer - Site de Richter, CS 79606, 34960, Montpellier Cedex 2, France

    Olivier Rousse & Benoît Sévi

Authors
  1. Olivier Rousse
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  2. Benoît Sévi
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Correspondence to Olivier Rousse .

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Editors and Affiliations

  1. ICF International, Washington, DC, USA

    Daniel Lieberman

  2. International Institute for Applied Systems Analysis, Laxenburg, Austria

    Matthias Jonas

  3. Systems Research Institute, Polish Academy of Sciences, Warsaw, Poland

    Zbigniew Nahorski

  4. International Institute for Applied Systems Analysis, Laxenburg, Austria

    Sten Nilsson

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Rousse, O., Sévi, B. (2007). The Impact of Uncertainty on Banking Behavior: Evidence from the US Sulfur Dioxide Emissions Allowance Trading Program. In: Lieberman, D., Jonas, M., Nahorski, Z., Nilsson, S. (eds) Accounting for Climate Change. Springer, Dordrecht. https://doi.org/10.1007/978-1-4020-5930-8_11

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