Complutense University Library

Moral hazard and tradeable pollution emission permits

Impacto



Álvarez González, Francisco and Camiña, Ester (2008) Moral hazard and tradeable pollution emission permits. [ Working Papers; nº 02, 2008, ]

[img] PDF
Creative Commons Attribution Non-commercial.

1MB

Official URL: http://eprints.ucm.es/9925/




Abstract

We consider a market for pollution emission permits in a setting in which pollution, generated as by-product of firms’ activity, is determined as the sum of firm-specific random shocks and each firm's abatement effort. In such a setting, an expected utility maximizer society demands an optimal abatement effort from each firm. As long as the abatement effort is decided by each firm and not observed by the environmental regulator, a moral hazard problem arises in which:
(i) firms (agents) have informational advantage with respect to the regulator (principal) and (ii) the only link among firms is precisely the market for permits, which is nothing but a chance to trade permits (contracts) once they have been assigned by the regulator. Our main point is to raise doubts on the social desirability of the -competitive- market, since it enlarges the firms’ strategy space. We theoretically characterize conditions under which the market improves (or worsens) the firms with respect to an autarchy scenario.

Resumen (otros idiomas)

Analizamos el mercado de derechos de emisión en un entorno en el que la contaminación, generada a partir de la actividad productiva de las empresas, se determina como la suma de un shock específico de cada empresa y la decisión de las mismas sobre el esfuerzo que dedican a reducir la contaminación. En este escenario, una sociedad mazimizadora de la utilidad desea inducir el esfuerzo óptimo en cada empresa. Dado que este esfuerzo lo decide cada empresa y no lo observa el regulador medioambiental, nos encontramos con un problema de riesgo moral en el que: (i) las empresas (agentes) tienen una ventaja informacional con respecto al regulador (principal) y (ii) el único enlace entre las empresas contaminantes es el mercado de derechos de emisión, que es una manera de intercambiar derechos (contratos) una vez han sido asignados por el regulador. Nuestro objetivo principal es analizar las consecuencias de la existencia de este mercado competitivo puesto que aumenta el conjunto de estrategias de las empresas. Desde un punto de vista teórico, caracterizamos las condiciones bajo las cuales el mercado mejora (o empeora) a las empresas con respecto a la situación sin mercado de derechos.

Item Type:Working Paper or Technical Report
Additional Information:

A previous version of this paper has been presented at the Third World Congress of Environmental and Resource Economists (Kyoto, 2006), 7th Meeting on Game Theory and Practice dedicated to Energy, Environment and Natural Resources (Montreal, 2007) and 22nd European Conference on Operational Research (Prague, 2007).

Uncontrolled Keywords:Moral Hazard; Emission permits market
Palabras clave (otros idiomas):Riesgo Moral; Mercado de derechos de emisión
Subjects:Social sciences > Economics > Stock exchanges
JEL:D21, D82
Series Name:Working Papers
Volume:2008
Number:02
ID Code:9925
References:

Alchian. A. and Demsetz, H. (1972). Productio, information costs, and economic organization". American Economic Review, 62, 777-795.

Copeland, B.R. and Taylor, M.S. (2005). "Free trade and global warming: a trade theory view of the Kyoto protocol". Journal of Environmental Economics and Management. 49, 205-234.

Holmström. B. (1979). "Moral hazard and observability". Bell Journal of Economics, 10(1), 74-91.

Holmström. B. (1982). "Moral hazard in teams". Bell Journal of Economics, 13(2), 324-340.

"Environmental Policy Integration in Europe" EEA Technical Report. No 2/2005.

Montgomery, W.D. (1972). "Markets in Licenses and Efficient Pollution Control Programs". Journal of Economic Theory, 5. 395-418.

Mookherjee, D. (1984). "0ptimal incentive schemes with many agents". Review of Economic Studies, 51, 433-446.

Macho-Stadler. I. and Pérez-Castrillo. D. (2006). "Optimal enforcement policy and firms' emissions and compliance with environmental taxes". Journal of Environmental Economics and Management, 51, 110-131.

Wainwright, K. (1999). "Environmental Regulation, Asymmetric Information and Moral Hazard". Mimeo: Simon Fraser University.

Xepapadeas. A.P. (1991). "Environmental Policy under Imperfect Information: Incentives and moral Hazard" Journal of Environmental Economics and Management, 20. 113-126.

Deposited On:25 Jan 2010 12:19
Last Modified:22 Sep 2016 12:58

Repository Staff Only: item control page