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Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking

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Abstract

We examine the incentives that firms have to invest in cleaner abatementtechnology when the banking of permits is allowed in emission permittrading schemes. We show that under certainty permit banking can distortincentives for investment and lead to a sub-optimal amount of investmentspending. Under imperfect information, aggregate abatement costuncertainty and investment irreversibility provide arguments for allowingbanking. We generalize the model to consider these, showing that somebanking is desirable but that it need not be the case that the privatebanking solution is optimal.

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Authors and Affiliations

  1. Department of Agricultural and Resource Economics, North Carolina State Univesity, U.S.A

    Daniel J. Phaneuf

  2. Interdisciplinary Institute for Environmental Economics, University of Heidelberg, Germany

    Till Requate

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  1. Daniel J. Phaneuf
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  2. Till Requate
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Correspondence to Till Requate.

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Phaneuf, D.J., Requate, T. Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking. Environmental and Resource Economics 22, 369–390 (2002). https://doi.org/10.1023/A:1016097000190

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  • DOI: https://doi.org/10.1023/A:1016097000190

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