Voluntary agreements with emission trading options in climate policy

✍ Scribed by Albrecht, Johan ;François, Delphine

• Publisher: John Wiley and Sons
• Year: 2001
• Tongue: English
• Weight: 204 KB
• Volume: 11
• Category: Article
• ISSN: 0961-0405
• DOI: 10.1002/eet.262

✦ Synopsis

Abstract

Recent political and corporate initiatives indicate that voluntary agreements and emission trading will play a crucial role in climate policy. We show that when emission trading is integrated as an option in voluntary agreement contracts, the overall efficiency of the use of flexible climate policy instruments is strongly increased. The emission trading option, formalized as a CO~2~ allowance call option contract that can be traded, provides clear incentives to overcomply with the target of the voluntary agreement. The option mechanism also delivers a market price for eventual non‐compliance, based on differences in abatement costs. With an example, we illustrate that the option mechanism can result in stimulating financial benefits for the firms that are most successful in reducing emissions. Copyright © 2001 John Wiley & Sons, Ltd and ERP Environment