Advertisement

The Impact of Uncertainty on Banking Behavior: Evidence from the US Sulfur Dioxide Emissions Allowance Trading Program

Chapter
  • 769 Downloads

Abstract

In this paper, we study empirically whether uncertainty has an influence on trade in the US sulfur dioxide allowances market. In particular, we investigate the role of uncertainty on banking behavior. To do this, we introduce a tractable, structural model of trading permits under uncertainty. The model establishes a relation between banking behavior and risk preferences, especially prudence in the Kimball (1990) sense. We then test this model using data on allowances, for utilities submitted to the US Environmental Protection Agency’s Acid Rain Program, carried over from one year to the next. Evidence is found of imprudence, namely, utilities bank permits in order to favor higher profits. Another finding is that larger utilities do not adopt behavior significantly different from that of smaller ones.

Keywords

emissions trading permits banking acid rain program uncertainty risk aversion prudence 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Albrecht, J., Verbeke T., & de Clercq, M. (2004). Informational Efficiency of the U.S. SO2 Permit Market, Faculty of Economics and Business Administration, Working Paper No. 250, Ghent University, Belgium.Google Scholar
  2. Arimura, T. H. (2002). An empirical study of the SO2 allowance market: effects of PUC regulations, Journal of Environmental Economics and Management, 44, 271–289.CrossRefGoogle Scholar
  3. Bailey, E. M. (1998). Allowance trading activity and state regulatory rulings: evidence from the u.s. acid rain program, MIT CEEPR Working Paper 98006, Center for Energy and Environmental Policy Research, Massachussetts Institute of Technology, Cambridge, MA.Google Scholar
  4. Baldursson, F. M., & von der Fehr, N.-H. M. (2004). Price volatility and risk exposure: on market-based environmental policy instruments, Journal of Environmental Economics and Management, 48, 682–704.CrossRefGoogle Scholar
  5. Ben-David, S., Brookshire, D., Burness, S., McKee, M., & Schmidt, C. (2000). Attitudes toward risk and compliance in emission permit market, Land Economics, 76, 590–600.CrossRefGoogle Scholar
  6. Bohi, D. R., & Burtraw, D. (1997). SO2 Allowance trading: how do expectations and experience measure up? Electricity Journal, 10, 67–75.CrossRefGoogle Scholar
  7. Browning, M., & Lusardi, A. (1996). Household saving: micro theories and micro facts, Journal of Economic Literature, 34, 1797–1855.Google Scholar
  8. Burtraw, D. (1996). The SO2 emissions trading program: cost savings without allowance trades, Contemporary Economic Policy, 14, 79–94.CrossRefGoogle Scholar
  9. Carlson, C., Burtraw, D., Cropper, M., & Palmer, K. L. (2000). Sulfur dioxide control by electric utilities: what are the gains from trade, Journal of Political Economy, 108, 1292–1326.CrossRefGoogle Scholar
  10. Carlson, D. A., & Sholtz, A. M. (1994). Designing pollution market instruments: a case of uncertainty, Contemporary Economic Policy, 12, 114–125.CrossRefGoogle Scholar
  11. Cason, T., & Gangadharan, L. (2003). Transactions costs in tradable permit markets: an experimental study of pollution market designs, Journal of Regulatory Economics, 23, 145–165.CrossRefGoogle Scholar
  12. Chicago Climate Exchange. (2004). The Sulfur Dioxide Emission Allowance Trading Program: Market Architecture, Market Dynamics and Pricing, Chicago Climate Exchange, Inc., Chicagor, IL.Google Scholar
  13. Considine, T. J., & Larson, D. F. (2004). The Environment as a Factor of Production, World Bank Policy Research Working Paper WPS 3271, Washington DC.Google Scholar
  14. Cronshaw, M., & Kruse, J. B. (1996). Regulated firms in pollution permit markets with banking, Journal of Regulatory Economics, 9, 179–189.CrossRefGoogle Scholar
  15. Cropper, M. L., & Oates, W. E. (1992). Environmental economics: a survey, Journal of Economic Literature, 30, 675–740.Google Scholar
  16. Dales, J. H. (1968). Pollution, Property and Prices, University of Toronto Press, Toronto, Canada.Google Scholar
  17. Eeckhoudt, L., & Gollier, C. (2005). The impact of prudence on optimal prevention, Economic Theory, 26, 989–994.CrossRefGoogle Scholar
  18. Ellerman, D. A., & Montero, J. P. (1998). The declining trend in sulfur dioxide emissions: implications for allowances prices, Journal of Environmental Economics and Management, 36, 26–45.CrossRefGoogle Scholar
  19. Ellerman, D. A., Joskow, P. L., Schmalensee, R., Montero, J. P., & Bailey, E. M. (2000). Markets for Clean Air: The U.S. Acid Rain Program, Cambridge University Press, New York.CrossRefGoogle Scholar
  20. Energy Information Administration. (2004). Annual Energy Review 2003, US Department of Energy, EIA, Washington DC.Google Scholar
  21. Godby, R. W., Mestelman, S. R., Muller, R. A., & Welland, J. D. (1997). Emissions trading with shares and coupons when control over discharges is uncertain, Journal of Environmental Economics and Management, 32, 359–381.CrossRefGoogle Scholar
  22. Gollier, C. (2001). The Economics of Risk and Time, MIT Press, Cambridge, MA.Google Scholar
  23. Hahn, R. W. (1984). Market power and transferable property rights, Quarterly Journal of Economics, 99, 753–765.CrossRefGoogle Scholar
  24. Hahn, R. W., & May, C. A. (1994). The behavior of the allowance market: theory and evidence, Electricity Journal, 7, 28–37.CrossRefGoogle Scholar
  25. Hennessy, D. A., & Roosen, J. (1999). Stochastic pollution, permits and merger incentives, Journal of Environmental Economics and Management, 37, 211–232.CrossRefGoogle Scholar
  26. Holthausen, D. M. (1979). Hedging and the competitive firm under price uncertainty, American Economic Review, 69, 989–995.Google Scholar
  27. Joskow, P. L., & Schmalensee, R. (1998). The political economy of market-based environmental policy: the u.s. acid rain program, Journal of Law and Economics, 41, 89–135.CrossRefGoogle Scholar
  28. Joskow, P. L., Schmalensee, R., & Bailey E. M. (1998). The market for sulfur dioxide emissions, American Economic Review, 88, 669–685.Google Scholar
  29. Kazarosian, M. (1997). Precautionary savings — a panel study, Review of Economics and Statistics, 79, 241–247.CrossRefGoogle Scholar
  30. Keeler, A. G. (1991). Noncompliant firms in transferable discharge permit markets: some extensions, Journal of Environmental Economics and Management, 21, 180–189.CrossRefGoogle Scholar
  31. Kimball, M. S. (1990). Precautionary savings in the small and in the large, Econometrica, 58, 53–73.CrossRefGoogle Scholar
  32. Kling, C. & Rubin, J. (1997). Bankable permits for the control of environmental pollution, Journal of Public Economics, 64, 99–113.CrossRefGoogle Scholar
  33. Liski, M., & Montero J. P. (2005). A note on market power in an emission permits market with banking, Environmental and Resource Economics, 31, 159–173.CrossRefGoogle Scholar
  34. Lusardi, A. (1998). On the importance of the precautionary saving motive, American Economic Review, Papers and Proceedings, 88, 449–453.Google Scholar
  35. Malik, A. S. (1990). Markets for pollution control when firms are non-compliant, Journal of Environmental Economics and Management, 18, 97–106.CrossRefGoogle Scholar
  36. Malik, A. S. (2002). Further results on permit markets with market power and cheating, Journal of Environmental Economics and Management, 44, 371–390.CrossRefGoogle Scholar
  37. Misiolek, W. S., & Elder, H. W. (1989). Exclusionary manipulation of markets for pollution rights, Journal of Environmental Economics and Management, 16, 156–166.CrossRefGoogle Scholar
  38. Montero, J. P. (1997). Marketable pollution permits with uncertainty and transactions costs, Resource and Energy Economics, 20, 27–50.CrossRefGoogle Scholar
  39. Montgomery, W. D. (1972). Markets in licenses and efficient pollution control programs, Journal of Economic Theory, 5, 395–418.CrossRefGoogle Scholar
  40. Rubin, J. (1996). A model of intertemporal emission trading, banking and borrowing, Journal of Environmental Economics and Management, 31, 122–136.CrossRefGoogle Scholar
  41. Sandmo, A. (1971). On the theory of the competitive firm under price uncertainty, American Economic Review, 61, 65–73.Google Scholar
  42. Schennach, S. M. (2000). The economics of pollution permit banking in the context of title iv of the 1990 clean air act amendments, Journal of Environmental Economics and Management, 40, 189–210.CrossRefGoogle Scholar
  43. Schmalensee, R., Joskow, P. L., Ellerman, D. A., Montero, J. P., & Bailey, E. M. (1998). An interim evaluation of sulfur dioxide emissions trading, Journal of Economic Perspectives, 12, 53–68.Google Scholar
  44. Skinner, J. (1988). Risky income, life-cycle consumption and precautionary savings, Journal of Monetary Economics, 22, 237–255.CrossRefGoogle Scholar
  45. Swift, B. (2001). How environmental laws work: an analysis of the utility sectors response to regulation of nitrogen oxides and sulfur dioxide under the clean air act, Tulane Environmental Law Journal, 14, 309–424.Google Scholar
  46. Tietenberg, T. H. (1985). Emissions Trading: An Exercise in Reforming Pollution Policy, Resources for the Future, Washington DC.Google Scholar
  47. van Egteren, H., & Weber, M. (1996). Marketable permits, market power, and cheating, Journal of Environmental Economics and Management, 30, 161–173.CrossRefGoogle Scholar

Copyright information

© Springer Science + Business Media B.V. 2007

Authors and Affiliations

  1. 1.Centre de Recherche en Économie et Droit de l’Énergie, Faculté des Sciences EconomiquesUniversité Montpellier IMontpellier Cedex 2France

Personalised recommendations