Attitudes toward Risk and Compliance in Emission Permit Markets

We investigate the effects of uncertainty and concomitant risk aversion as they impact the incentive structure and subsequent operation of an emissions permit market modeled after the U.S. SO2market. Our theoretical results suggest that uncertainty dulls incentives to achieve cost savings through pe...

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Bibliographic Details
Published in:Land economics 2000-11, Vol.76 (4), p.590-600
Main Authors: Ben-David, Shaul, Brookshire, David, Burness, Stuart, McKee, Michael, Schmidt, Christian
Format: Article
Language:English
Subjects:
Air pollution
Attitudes
Compliance
Cost control
Cost savings
Economic models
Economic theory
Economic uncertainty
Efficiency metrics
Efficient markets
Emissions trading
Environmental management
Incentives
Investment risk
Land economics
Land use
Law
Market prices
Pollutant emissions
Pollution control
Regulation
Risk
Risk aversion
Studies
Trade volume
Uncertainty
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Summary:We investigate the effects of uncertainty and concomitant risk aversion as they impact the incentive structure and subsequent operation of an emissions permit market modeled after the U.S. SO2market. Our theoretical results suggest that uncertainty dulls incentives to achieve cost savings through permit trading and inhibits efficient allocation of abatement efforts by firms. We test hypotheses in an experimental laboratory setting and find that the irreversibility of investment in abatement technology may present countervailing incentives for potential sellers of permits, resulting in a wait and see attitude toward adoption of efficient levels of abatement technology.
ISSN:0023-7639
1543-8325
DOI:10.2307/3146954