April 17, 2011

Pollution Permits, Strategic Trading and Dynamic Technology Adoption

by Santiago Moreno-Bromberg and Luca Taschini

- This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can invest both in low-emitting production technologies and trade permits. In the model, technology adoption and allowance price are generated endogenously and are inter-dependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value reflects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status.

Moreno-Bromberg, S. and L. Taschini (2011). "Pollution Permits, Strategic Trading and Dynamic Technology Adoption." CESifo Working Paper No. 3399, Mar 2011.