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

Research Article


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.


uncertainty bankable emission trading market performance 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    Ellerman D. Designing a tradable permit system to control SO2 emissions in China: principles and practice. Energy Journal (Cambridge, Mass.), 2002, 23(2): 1–26Google Scholar
  2. 2.
    Bing Z, Yu Q Q, Jun B. Policy design and performance of emissions trading markets: an adaptive agent-based analysis. Environmental Science & Technology, 2010, 44(15): 5693–5699CrossRefGoogle Scholar
  3. 3.
    Carlson D A, Sholtz A M. Designing pollution market instruments: cases of uncertainty. Contemporary Economic Policy, 1994, 12(4): 114–125CrossRefGoogle Scholar
  4. 4.
    Godby R W, Mestelman S, Muller R A, Welland J D. Emissions trading with shares and coupons when control over discharges is uncertain. Journal of Environmental Economics and Management, 1997, 32(3): 359–381CrossRefGoogle Scholar
  5. 5.
    Zhang F. Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy. Policy Research Working Paper Series No 4215. Washington, DC: The World Bank, 2007CrossRefGoogle Scholar
  6. 6.
    Ben-David S, Brookshire D, Burness S, McKee M, Schmidt C. Attitudes toward risk and compliance in emission permit markets. Land Economics, 2000, 76(4): 590–600CrossRefGoogle Scholar
  7. 7.
    Stavins R N. Transaction cost and tradable permits. Journal of Environmental Economics and Management, 1995, 29(2): 133–148CrossRefGoogle Scholar
  8. 8.
    Montero J P. Marketable pollution permits with uncertainty and transaction costs. Resource and Energy Economics, 1998, 20(1): 27–50CrossRefGoogle Scholar
  9. 9.
    Carlén B. Market power in international carbon emissions trading: a laboratory test. Energy Journal (Cambridge, Mass.), 2003, 24(3): 1–26Google Scholar
  10. 10.
    Cason T N, Gangadharan L, Duke C. Market power in tradable emission markets: a laboratory testbed for emission trading in Port Phillip Bay, Victoria. Ecological Economics, 2003, 46(3): 469–491CrossRefGoogle Scholar
  11. 11.
    Malik A S. Markets for pollution control when firms are noncompliant. Journal of Environmental Economics and Management, 1990, 18(2): 97–106CrossRefGoogle Scholar
  12. 12.
    Jiao J L, Ge H Z, Wei Y M. Impact analysis of China’s coalelectricity price linkage mechanism: results from a game model. Journal of Policy Modeling, 2010, 32(4): 574–588CrossRefGoogle Scholar
  13. 13.
    Burtraw D, Szambelan S J. U.S. Emissions Trading Markets for SO2 and NOx. Resources for the Future Discussion Paper No. 09-40. Washington, DC: Resources for the Future, 2009Google Scholar
  14. 14.
    Holtsmark B, Mæstad O. Emission trading under the Kyoto Protocol-effects on fossil fuel markets under alternative regimes. Energy Policy, 2002, 30(3): 207–218CrossRefGoogle Scholar
  15. 15.
    Bonacina M, Gullì F. Electricity pricing under “carbon emissions trading”: a dominant firm with competitive fringe model. Energy Policy, 2007, 35(8): 4200–4220CrossRefGoogle Scholar
  16. 16.
    Kara M, Syri S, Lehtilä, A, Helynen S, Kekkonen V, Ruska M, Forsström J. The impacts of EU CO2 emissions trading on electricity markets and electricity consumers in Finland. Energy Economics, 2008, 30(2): 193–211CrossRefGoogle Scholar
  17. 17.
    Linares P, JavierSantos F, Ventosa M, Lapiedra L. Impacts of the European emission trading directive and permit assignment methods on the Spanish electricity sector. Energy Journal (Cambridge, Mass.), 2006, 27(1): 79–98Google Scholar
  18. 18.
    Smale R, Hartley M, Hepburn C, Ward J, Grubb M. The impacts of CO2 emissions trading on firm profits and market prices. Climate Policy, 2006, 6(1): 31–49Google Scholar
  19. 19.
    Kim W, Chattopadhyay D, Park J. Impact of carbon cost on wholesale electricity price: a note on price pass-through issues. Energy, 2010, 35(8): 3441–3448CrossRefGoogle Scholar
  20. 20.
    Bunn D, Fezzi C. Interaction of European Carbon Trading and Energy Prices. FEEM Working Paper No. 63.2007. London: London Business School, 2007Google Scholar
  21. 21.
    Daskalakis G, Markellos R N. Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, nord pool and powernext. Energy Policy, 2009, 37(7): 2594–2604CrossRefGoogle Scholar
  22. 22.
    Chevallier J. The impact of Australian ETS news on wholesale spot electricity prices: an exploratory analysis. Energy Policy, 2010, 38(8): 3910–3921CrossRefGoogle Scholar
  23. 23.
    Schennach S M. The economics of pollution permit banking in the context of Title IV of the 1990 Clean Air Act Amendments. Journal of Environmental Economics and Management, 2000, 40(3): 189–210CrossRefGoogle Scholar
  24. 24.
    Boutaba M A, Beaumais O, Lardic S. Permit Price Dynamics in the U.S. SO2 Trading Scheme: A Cointegration Approach. Rouen Cedex: University of Rouen, 2008Google Scholar
  25. 25.
    Refsgaard J C, van der Sluijs J P, Højberg A L, Vanrolleghem P A. Uncertainty in the environmental modelling process-a framework and guidance. Environmental Modelling & Software, 2007, 22(11): 1543–1556CrossRefGoogle Scholar
  26. 26.
    van der Sluijs J P. Uncertainty and precaution in environmental management: insights from the UPEM conference. Environmental Modelling & Software, 2007, 22(5): 590–598CrossRefGoogle Scholar
  27. 27.
    Jolma A, Norton J. Methods of uncertainty treatment in environmental models. Environmental Modelling & Software, 2005, 20(8): 979–980CrossRefGoogle Scholar
  28. 28.
    Hennessy D A, Roosen J. Stochastic pollution, permits and merger incentives. Journal of Environmental Economics and Management, 1999, 37(3): 211–232CrossRefGoogle Scholar
  29. 29.
    Baldursson F M, von der Fehr N H M. Price volatility and risk exposure: on market-based environmental policy instruments. Journal of Environmental Economics and Management, 2004, 48(1): 682–704CrossRefGoogle Scholar
  30. 30.
    Feng H L, Zhao J H. Alternative intertemporal permit trading regimes with stochastic abatement costs. Resource and Energy Economics, 2006, 28(1): 24–40CrossRefGoogle Scholar
  31. 31.
    Rousse O, Sevi B. Behavioral heterogeneity in the U.S. sulfur dioxide emissions allowance trading program. In: Proceedings of the 45th Congress of the European Regional Science Association, Amsterda. Amsterdam: Vrije University, 2005, 1–20Google Scholar
  32. 32.
    Montgomery W D. Markets in licenses and efficient pollution control programs. Journal of Economic Theory, 1972, 5(3): 395–418CrossRefGoogle Scholar
  33. 33.
    Falk I, Mendelsohn R. The economics of controlling stock pollutants: an efficient strategy for greenhouse gases. Journal of Environmental Economics and Management, 1993, 25(1): 76–88CrossRefGoogle Scholar
  34. 34.
    Rubin J D. A model of intertemporal emission trading, banking, and borrowing. Journal of Environmental Economics and Management, 1996, 31(3): 269–286CrossRefGoogle Scholar
  35. 35.
    Kling C, Rubin J. Bankable permits for the control of environmental pollution. Journal of Public Economics, 1997, 64(1): 101–115CrossRefGoogle Scholar
  36. 36.
    Stranlund J K. A Safety Valve for Emissions Trading. University of Massachusetts Amherst Department of Resource Economics Working Paper 2009-4. Amherst: University of Massachusetts Amherst, 2009Google Scholar
  37. 37.
    Jacoby H D, Ellerman A D. The safety valve and climate policy. Energy Policy, 2004, 32(4): 481–491CrossRefGoogle Scholar
  38. 38.
    Fell H, Burtraw D, Morgenstern R, Palmer K, Preonas L. Soft and Hard Price Collars in a Cap-and-Trade System: A Comparative Analysis. Washington DC: Resource for Future, 2010Google Scholar
  39. 39.
    Stirling A. Risk, uncertainty and precaution: some instrumental implications from the social sciences. In: Berkhout F, Leach M, Scoones I, eds. Negotiating Environmental Change. Cheltenham: Edward Elgar, 2003, 33–76Google Scholar

Copyright information

© Higher Education Press and Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.State Key Laboratory of Pollution Control & Resource Reuse, School of EnvironmentNanjing UniversityNanjingChina

Personalised recommendations