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Emission permit trading is a centerpiece of the Kyoto Protocol which allows participating nations to trade and bank greenhouse gas permits under the Framework Convention on Climate Change. When market conditions evolve stochastically, emission trading produces a dynamic problem, in which anticipation about the future economic environment affects current banking decisions. In this paper, the author explores the effect of increased uncertainty over future output prices and input costs on the temporal distribution of emissions. In a dynamic programming setting, a permit price is a convex function of stochastic prices of electricity and fuel. Increased uncertainty about future market conditions increases the expected permit price and causes a risk-neutral firm to reduce ex ante emissions so as to smooth out marginal abatement costs over time. The convexity results from the asymmetric impact of changes in counterfactual emissions on the change of marginal abatement costs. Empirical analysis corroborates the theoretical prediction. The author finds that a 1 percent increase in electricity price volatility measured by the annualized standard deviation of percentage price change is associated with an average decrease in the annual emission rate by 0.88 percent. Numerical simulation suggests that high uncertainty could induce substantially early abatements, as well as large compliance costs, therefore imposing a tradeoff between environmental benefits and economic efficiency. The author discusses policy implications for designing an effective and efficient global carbon market.

Abatement Costs --- Carbon Market --- Carbon Policy and Trading --- Clean Air --- Climate Change --- Climate Change Policy --- Demand For Energy --- Electricity --- Electricity Price --- Emerging Markets --- Emission --- Emission Cap --- Emissions --- Energy --- Energy and Environment --- Energy Production and Transportation --- Environment --- Environment and Energy Efficiency --- Environmental Economics and Policies --- Facilities --- Fuel --- Greenhouse Gas --- Investment --- Macroeconomics and Economic Growth --- Markets and Market Access --- Permit Trading --- Price --- Prices --- Private Sector Development --- Public Sector Development --- Sulfur --- Sulfur Dioxide

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Carbon dioxide mitigation --- Climatic changes --- International trade --- Law and legislation --- Government policy --- Environmental aspects --- Law and legislation. --- Government policy. --- Environmental aspects. --- External trade --- Foreign commerce --- Foreign trade --- Global commerce --- Global trade --- Trade, International --- World trade --- Changes, Climatic --- Climate change --- Climate changes --- Climate variations --- Climatic change --- Climatic fluctuations --- Climatic variations --- Global climate changes --- Global climatic changes --- Atmospheric carbon dioxide mitigation --- Carbon dioxide capture --- Mitigation of carbon dioxide --- Commerce --- International economic relations --- Non-traded goods --- Climatology --- Climate change mitigation --- Teleconnections (Climatology) --- Environmental law --- Pollution prevention --- Changes in climate --- Climate change science --- politique en matière de changement climatique. --- droit de l'environnement. --- pravo okoliša --- environmentálne právo --- prawo ochrony środowiska --- право за животна средина --- Derecho del medio ambiente --- miljøret --- ympäristöoikeus --- Umweltrecht --- environmental law --- környezetvédelmi jog --- e drejta e mjedisit --- diritto dell'ambiente --- dreptul mediului --- vides tiesības --- δίκαιο του περιβάλλοντος --- miljörätt --- ekologické právo --- екологично право --- pravo okolja --- dritt ambjentali --- aplinkos teisė --- keskkonnaõigus --- право заштите животне средине --- milieurecht --- direito do ambiente --- miljöbestämmelser --- δίκτυο IMPEL --- vides likumdošana --- право за заштита на животната средина --- vides aizsardzības noteikumi --- ympäristölainsäädäntö --- milieuwetgeving --- normativa ambientale --- reglamentación del medio ambiente --- normativa de medio ambiente --- ympäristömääräykset --- rrjeti i ZEDM-së --- miljølovgivning --- környezetvédelmi jogszabályok --- normatīvie akti vides jomā --- Derecho medioambiental --- ekologické zákony --- a környezeti jog alkalmazására és végrehajtására létrehozott EU-hálózat --- législation environnementale --- aplinkos nuostatai --- IMPEL tinklas --- siete IMPEL --- keskkonnaõiguse rakendamise ja jõustamise Euroopa võrgustik --- legislazione ambientale --- legislación medioambiental --- síť IMPEL --- nätverket IMPEL --- IMPEL tīkls --- okolišno zakonodavstvo --- miljölagstiftning --- ИМПЕЛ --- IMPEL network --- reglementări privind mediul --- legislación sobre el medio ambiente --- regulamentação do ambiente --- keskkonnaalased õigusaktid --- rețeaua IMPEL --- omrežjem IMPEL --- sieć IMPEL --- IMPEL-verkosto --- keskkonnaeeskirjad --- Umweltschutzvorschrift --- environmental regulations --- réseau IMPEL --- environmental legislation --- περιβαλλοντική νομοθεσία --- ekologická legislativa --- IMPEL-Netz --- Bendrijos aplinkos teisės įgyvendinimo tinklas --- ZEDM --- red IMPEL --- мрежа на ЕУ за спроведување на прописите за животна средина --- IMPELi võrgustik --- IMPEL --- aplinkos įstatymai --- environmentální právo --- rede IMPEL --- ekologické predpisy --- Implementation and Enforcement of Environmental Law --- gennemførelse og håndhævelse af miljølovgivning --- СППЖС --- περιβαλλοντικές ρυθμίσεις --- réglementation de l'environnement --- legislație privind mediul --- IMPEL-netwerk --- voorschriften voor milieubeheer --- IMPEL-nettet --- Zbatimi dhe Ekzekutimi i së Drejtës Mjedisore --- zákony na ochranu životního prostředí --- ekologické předpisy --- legjislacion mjedisi --- miljøbestemmelser --- környezeti jog --- еколошко право --- rregullore mjedisi --- keskkonnakaitse õigusaktid --- rete IMPEL --- мрежата IMPEL --- legislatíva životného prostredia --- ekologinė teisė --- IMPEL-hálózat --- propisi o okolišu --- klimato kaitos politika --- polityka przeciwdziałania zmianie klimatu --- politika dwar il-bidla fil-klima --- beartas aeráide --- politica in materia di cambiamenti climatici --- политика в областта на изменението на климата --- klimata pārmaiņu politika --- climate change policy --- politica privind schimbările climatice --- politika o podnebnih spremembah --- политика у области климатских промена --- πολιτική για την αλλαγή του κλίματος --- éghajlat-változási politika --- klimatpolitik --- politika v oblasti změny klimatu --- política para as alterações climáticas --- politika klimatske promjene --- Klimapolitik --- politikë e ndryshimit të klimës --- beleid inzake klimaatverandering --- política en materia de cambio climático --- ilmastonmuutospolitiikka --- politika v oblasti zmeny klímy --- политика за климатски промени --- Klimaschutzpolitik --- kliimamuutuste poliitika --- klimaatveranderingsbeleid --- действия срещу изменението на климата --- climate policy --- politika v oblasti klimatických zmien --- politikë klimaterike --- politikë në përgjigje të ndryshimit klimaterik --- action face au changement climatique --- klimatåtgärder --- klimatska politika --- политика срещу изменението на климата --- climate action --- acción ante el cambio climático --- policy for responding to climate change --- beartas don athrú aeráide --- dlí an chomhshaoil --- Global environmental change --- Commerce international --- Aspect de l'environnement