School of Economics and Finance

No. 638: Environmental Policy under Ambiguity

Leon Vinokur , Queen Mary, University of London

March 1, 2009

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The aim of this paper is to extend existing literature on carbon allowance allocation, investigating the impact of uncertainty and ambiguity, due to the lack of future Environmental policy, on the total production in the market. Specifically, we show that an increase in uncertainty has no effect on the total output, whereas an increase in ambiguity leads to a decrease in the total output. An output-based allocation model in Cournot Oligopoly will be used. We will adopt the National Allocation Plan (NAP) of UK for the Second Phase (2005-07) as a case study.

J.E.L classification codes: D2, D8, Q4

Keywords:Carbon allowances, Permits allocation, EU ETS, Uncertainty