Environmental Policy and Speculation on Markets for Emission Permits

Colla, Paolo;Germain, Marc;Van Steenberghe, Vincent
(2012) Economica — Vol. 79, n° 313, p. 152-182 (2012)

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Authors
  • Colla, PaoloUniversità Bocconi
    Author
  • Germain, MarcUCLouvain
    Author
  • Van Steenberghe, VincentUCLouvain
    Author
Abstract
Speculators are active in large markets for emission permits such as those developing under the Kyoto Protocol. Since speculators help risk-averse firms hedging the risk stemming from uncertain future demand, their entry reduces permits' expected returns and volatility. We characterize the optimal environmental policy by the agency setting the total amount of permits when speculators are active. Whenever the agency is sufficiently risk-tolerant, speculators improve aggregate welfare by fostering firms' production. On the other hand, under a moderately risk-averse agency, the increase in production volatility induced by speculators negatively affects social welfare. © The Authors. Economica © 2010 The London School of Economics and Political Science.
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Colla, P., Germain, M., & Van Steenberghe, V. (2012). Environmental Policy and Speculation on Markets for Emission Permits. Economica, 79(313), 152-182. https://doi.org/10.1111/j.1468-0335.2010.00866.x (Original work published 2012)