Contacts
A paper by Anna Cretì and Alain Bousquet shows that uncertainty over the cost of polluting production factors does not push toward their exclusion from the productive process, but to plant capacity that uses more of them

Uncertainty is not only bad for the economy, but for the environment, too. This is what Alain Bousquet (University of Toulouse) e Anna Cretì (IEFE Bocconi) show in their paper Input choice under carbon constraint, presented this morning at the research workshop "Climate policy and long term decisions – Investment and R&D", organized Bocconi IEFE and Ecole Polytéchnique of Paris.

Bousquet and Cretì hypothesize a production function using only two types of inputs, one polluting factor and a clean one. The existence of emission rights translates into an increase in the cost of the polluting factor, thus posing a quantitative constraint on its use. The two researchers have built a two-stage decision model, in which operators take the decision over production capacity in the first stage, in a situation where there's uncertainty over factor costs. In the second stage, uncertainty is solved and producers decide with precision what quantities of inputs are to be used.

Well, uncertainty in the first stage pushes firms to maintain a certain a reserve capacity of the polluting factor, to be exploited in case the cost goes down. In case of total certainty, such maximum capacity would be less. Conversely, it is larger, the higher the variability in costs.

The study compares a situation in which the price of emission rights is fixed with respect to a situation where it is random. Also in this case, uncertainty leads to suboptimality. Given certain hypotheses on the technology used, both solutions cause a reduction in emissions with respect to the absence of a market for emission permits, but a stable price of permits translates in a much larger cut with respect to the situation where price varies.

Research