Flexibility premium of emissions permits

Luca Taschini*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

Investments in abatement technology are often characterised by irreversibility and significant implementation lags, whereas emissions permits can be traded at any time. As such, abatement and emissions permit trading systems are hardly perfect substitutes. We formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment/divestment lags and irreversibility in relation to the price of emissions permits. Using option pricing concepts, we reformulate the technology adoption problem in terms of the technology's characteristics (irreversibility and implementation lags) and offer a conceptual quantification of the flexibility premium of emissions permits.

Original languageEnglish
Article number104013
Pages (from-to)1-15
Number of pages16
JournalJournal of Economic Dynamics and Control
Early online date24 Oct 2020
DOIs
Publication statusE-pub ahead of print - 24 Oct 2020

Keywords / Materials (for Non-textual outputs)

  • cap-and-trade
  • carbon markets
  • climate change
  • implementation delay
  • irreversible investment

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