Environmental Policy and Speculation on Markets for Emission Permits

CORE Discussion Paper No. 2005/66

21 Pages Posted: 10 Jul 2006

See all articles by Paolo Colla

Paolo Colla

Bocconi University - Department of Finance; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

M. Germain

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Vincent van Steenberghe

Belgian Federal Ministry for the Environment

Date Written: October 2005

Abstract

Tradable emission permits share many characteristics with financial assets. As on financial markets, speculators are likely to be active on large markets for emission permits such as those developing under the Kyoto Protocol. We show how the presence of speculators on a market for emission permits affects the price of these permits when firms face risk aversion. The agency in charge of the optimal environmental policy should account for the presence of speculators when determining the total amount of permits to issue.

Suggested Citation

Colla, Paolo and Germain, M. and van Steenberghe, Vincent, Environmental Policy and Speculation on Markets for Emission Permits (October 2005). CORE Discussion Paper No. 2005/66, Available at SSRN: https://ssrn.com/abstract=912636 or http://dx.doi.org/10.2139/ssrn.912636

Paolo Colla (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

M. Germain

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Vincent Van Steenberghe

Belgian Federal Ministry for the Environment

Brussels
Belgium