We study the market for emission permits in the presence of reversible abatement measures characterized by delay in implementation. We assume that the new operating profits follow a one-dimensional geometric Brownian motion and that the company is risk-neutral. The optimal "investment" and "disinvestment" policy for reversible abatement options is valuated under both instantaneous and Parisian criteria, nesting the model of Bar-Ilan and Strange (1996). By taking the difference between these two values at their respective optima, we derive an analytic solution of the premium for flexibility embedded in marketable permits. This extends the findings in Chao and Wilson (1993) and Zhao (2003). Numerical results are presented to illustrate the likely magnitude of the premium and how it is affected by uncertainty and delays in implementation.

Speaker

Luca Taschini

London School of Economics

Date

04.02.2010 | 16:00 - 17:30 Uhr

Event Location

ZEW, L 7,1 D-68161 Mannheim

Room

Heinz König Hall