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Early Emission Reduction Programs: An Application to CO2 Policy

Ian W.H. Parry and Michael Toman

Year: 2002
Volume: Volume23
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No1-4
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In the wake of the 1997 Kyoto Protocol, which if implemented would oblige industrialized countries to meet targets for greenhouse gases (GHGs) In 2008-2012, there have been several proposals to reduce emissions during the interim period. A concern for early reduction also arises in other policy contexts. This paper uses a series of simple models and numerical illustrations to analyze voluntary early reduction credits for GHGs. We examine several issues that affect the economic performance of these policies, including asymmetric information, learning-by-doing, and fiscal impacts, and we compare their performance with that of an early cap-and-trade program. We find that the economic benefits of early credit programs are likely to be limited, unless these credits can be banked to offset future emissions. Such banking was not allowed under the Kyoto Protocol. An early cap-and-trade program can avoid many of the problems of early credits, provided it does not require excessive abatement.

European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)

Emilie Alberola and Julien Chevallier

Year: 2009
Volume: Volume 30
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No3-3
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The price of European Union Allowances (EUAs) has been declining at far lower levels than expected during Phase I (2005-2007). Previous literature identifies among its main explanations over-allocation concerns, early abatement efforts in 2005, and possibly decreasing abatement costs in 2006. We advocate low allowance prices may also be explained by banking restrictions between 2007 and 2008. Based on a Hotelling-CAPM analysis, we provide statistical evidence that the French and Polish decisions to ban banking contribute to the explanation of low EUA Phase I prices. Besides, we provide the first rigorous empirical verification that the cost-of-carry relationship between EUA spot and futures prices for delivery during Phase II does not hold after the enforcement of the inter-period banking restrictions. This situation may be interpreted as a sacrifice of the temporal flexibility offered to industrials in Phase I to correct design inefficiencies, and achieve an efficient price pattern in Phase II.

Oil Prices and Banking Instability: A Jump-Diffusion Model for Bank Capital Structure

Willi Semmler and Samar Issa

Year: 2019
Volume: Volume 40
Number: Special Issue
DOI: 10.5547/01956574.40.SI2.wsem
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We develop an empirical model of bank capital structure to study the impact of large oil shocks on overleveraging of banks which presents severe challenges for banks' balance sheet management. The measure of overleveraging builds on the Stein (2012) model by adding a jump-diffusion component that captures the jump size and intensity of predictors such as oil prices and political instability. Overleveraging is derived and estimated for a sample of six banks in three oil-producing countries and Western countries using the Markov Chain Monte Carlo (MCMC) method, for the years 2006-2016. The estimation of the optimal debt shows that most of the banks in this context had a high optimal debt around 2008, overlapping with the oil price shock. In addition, most of the predictors, namely oil prices and political instability factors proxied by terrorism, political corruption, and military expenses, regularly appeared in volatility and jump intensity factors.

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