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Prices Versus Quantities in a Vintage Capital Model

In: Dynamic Systems, Economic Growth, and the Environment

Author

Listed:
  • Thierry Bréchet

    (Université catholique de Louvain)

  • Tsvetomir Tsachev

    (Bulgarian Academy of Sciences)

  • Vladimir M. Veliov

    (Vienna University of Technology)

Abstract

The heterogeneity of the available physical capital with respect to productivity and emission intensity is an important factor for policy design, especially in the presence of emission restrictions. In a vintage capital model, reducing pollution requires to change the capital structure through investment in cleaner machines and to scrap the more polluting ones. In such a setting we show that quantity-based or a price-based regulation may yield contrasting outcomes. We also show that some failures in the permits market may undermine its efficiency and that imposing the emission cap over longer periods plays a regularizing role in the market, that is, ensures a positive market price of permits and decreases its volatility.

Suggested Citation

  • Thierry Bréchet & Tsvetomir Tsachev & Vladimir M. Veliov, 2010. "Prices Versus Quantities in a Vintage Capital Model," Dynamic Modeling and Econometrics in Economics and Finance, in: Jesús Crespo Cuaresma & Tapio Palokangas & Alexander Tarasyev (ed.), Dynamic Systems, Economic Growth, and the Environment, pages 141-159, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-02132-9_7
    DOI: 10.1007/978-3-642-02132-9_7
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