2021/02/24 by René Aïd, Aïd, René, Sara Biagini +1 · 3 citations
Economics, Econometrics and Finance · Energy · Environmental Science · #Climate Change Policy and Economics #Energy, Environment, and Transportation Policies #Environmental Impact and Sustainability
paper · pdf · doi:10.48550/arxiv.2102.12423
We consider the problem of reducing the carbon emissions of a set of firms\nover a finite horizon. A regulator dynamically allocates emission allowances to\neach firm. Firms face idiosyncratic as well as common economic shocks on\nemissions, and have linear quadratic abatement costs. Firms can trade\nallowances so to minimise total expected costs, from abatement and trading plus\na quadratic terminal penalty. Using variational methods, we exhibit in\nclosed-form the market equilibrium in function of regulator's dynamic\nallocation. We then solve the Stackelberg game between the regulator and the\nfirms. Again, we obtain a closed-form expression of the dynamic allocation\npolicies that allow a desired expected emission reduction. Optimal policies are\nnot unique but share common properties. Surprisingly, all optimal policies\ninduce a constant abatement effort and a constant price of allowances. Dynamic\nallocations outperform static ones because of adjustment costs and uncertainty,\nin particular given the presence of common shocks. Our results are robust to\nsome extensions, like risk aversion of firms or different penalty functions.\n