January 23, 2011

Price versus tradable quantity regulation. Uncertainty and endogenous technology choice

by Halvor Briseid Storrøsten

- This paper shows that tradable emissions permits and an emissions tax have a risk-related technology choice effect. We first examine the first- and second-order moments in the probability distributions of optimal abatement and production under the two instruments. The two instruments will, in general, lead to different expected aggregate production levels when technology choice is endogenous, given that regulation is designed to induce equal expected aggregate emissions. Moreover, either regulatory approach may induce larger variance in optimal production and optimal abatement levels, depending on the specification of the stochastic variables.

Briseid Storrøsten, H. (2011). "Price versus tradable quantity regulation. Uncertainty and endogenous technology choice." Statistics Norway, Discussion Papers No. 643, Jan 2011.