Price Floor Research Articles

How to deal with climate change

Climate change is a complex and contentious public issue, but the risk-management options available to us are straightforward and have well-characterized strengths and weaknesses.

Managing Quantity, Quality, and Timing in Indian Cane Sugar Production: Ex Post Marketing Permits or Ex Ante Production Contracts?

Private sugar processors in Andhra Pradesh, India use an unusual form of vertical coordination. They issue 'permits' to selected cane growers a few weeks before harvest. These permits specify the amount of cane to be delivered during a narrow time period. This article investigates why processors create uncertainty among farmers using ex post permits instead of ex ante production contracts. The theoretical model predicts that ex post permits are more profitable than ex ante contracts or the spot market under existing government regulations in the sugar sector, which include a binding price floor for cane and the designation of a reserve area for each processor wherein it has a legal monopsony for cane. The use of ex post permits creates competition among farmers to increase cane quality, which increases processor profits and farmer costs. Empirical analysis supports the hypothesis that farmers operating in private factory areas have higher unit production costs than do their counterparts who patronize cooperatives.

Carbon markets: Effective policy?—Response

Cullenward and Wara raise two main issues: (i) Are carbon markets delivering the reductions they were designed to deliver? (ii) Can we use economic theory to calculate the extent to which carbon markets are reducing emissions? They then highlight two problems—leakage and offsets—that suggest carbon markets are not performing as designed. Emission targets and programs are often designed with some understanding of potential problems. The Regional Greenhouse Gas Initiative (RGGI) was fully aware of the potential for leakage to neighboring regions, and intentionally designed their program to operate with low prices that limit leakage ([ 1 ][1]). California may have believed that it could successfully address leakage, but it also implemented a price floor that largely protects the rest of the program if it occurs ([ 2 ][2]). The European Union placed strict limits on the use of offsets, in turn limiting the potential for their abuse ([ 3 ][3]). Similarly, the Bonn and Marrakech conferences after the Kyoto Protocol largely renegotiated the original targets through limits on credits for carbon sinks, highlighting how even credit provisions that are widely acknowledged to influence environmental effectiveness can be part of an intentional program design ([ 4 ][4]). We believe that although leakage and problematic offsets are never desirable, they are often occurring in a way that was anticipated at the time the program was designed. To answer Cullenward and Wara's second question, we do not think that leakage and offsets negate the mitigation effects of the observed carbon price. We argue that carbon markets—even if flawed—are working and are reducing emissions. Leakage and certain offsets can yield reduction credit where it has not actually occurred in aggregate. Such reductions, however, are in addition to all of the real abatement activities that will occur at a given market price. We can certainly imagine subtleties that caution us from being too precise about our rough calculations, but our review suggests these issues are not problematic. 1. [↵][5]RGGI Emission Leakage Multi-State Staff Working Group, “Potential emissions leakage and the Regional Greenhouse Gas Initiative (RGGI): Evaluating market dynamics, monitoring options, and possible mitigation mechanisms” (2007); [www.rggi.org/docs/il\_report\_final\_3\_14_07.pdf][6]. 2. [↵][7]1. H. G. Fell, 2. D. Burtraw, 3. R. D. Morgenstern, 4. K. L. Palmer, 5. L. Preonas , Soft and hard price collars in a cap-and-trade system: A comparative analysis (Resources for the Future Discussion Paper 10-27-REV, 2010). 3. [↵][8]1. D. A. Ellerman, 2. F. J. Convery, 3. C. de Perthius , Pricing Carbon (Cambridge Univ. Press, Cambridge, 2010). 4. [↵][9]1. C. Bohringer , Oxford Rev. Econ. Pol. 19, 451 (2003). [OpenUrl][10][Abstract][11] [1]: #ref-1 [2]: #ref-2 [3]: #ref-3 [4]: #ref-4 [5]: #xref-ref-1-1 View reference 1 in text [6]: http://www.rggi.org/docs/il_report_final_3_14_07.pdf [7]: #xref-ref-2-1 View reference 2 in text [8]: #xref-ref-3-1 View reference 3 in text [9]: #xref-ref-4-1 View reference 4 in text [10]: {openurl}?query=rft.jtitle%253DOxford%2BReview%2Bof%2BEconomic%2BPolicy%26rft.stitle%253DOXF%2BREV%2BECON%2BPOLICY%26rft.aulast%253DBohringer%26rft.auinit1%253DC.%26rft.volume%253D19%26rft.issue%253D3%26rft.spage%253D451%26rft.epage%253D466%26rft.atitle%253DThe%2BKyoto%2BProtocol%253A%2BA%2BReview%2Band%2BPerspectives%26rft_id%253Dinfo%253Adoi%252F10.1093%252Foxrep%252F19.3.451%26rft.genre%253Darticle%26rft_val_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Ajournal%26ctx_ver%253DZ39.88-2004%26url_ver%253DZ39.88-2004%26url_ctx_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Actx [11]: /lookup/ijlink/YTozOntzOjQ6InBhdGgiO3M6MTQ6Ii9sb29rdXAvaWpsaW5rIjtzOjU6InF1ZXJ5IjthOjQ6e3M6ODoibGlua1R5cGUiO3M6NDoiQUJTVCI7czoxMToiam91cm5hbENvZGUiO3M6NToib3hyZXAiO3M6NToicmVzaWQiO3M6ODoiMTkvMy80NTEiO3M6NDoiYXRvbSI7czoyNToiL3NjaS8zNDQvNjE5MS8xNDYwLjMuYXRvbSI7fXM6ODoiZnJhZ21lbnQiO3M6MDoiIjt9

The effects of a “no-haggle” channel on marketing strategies

As sellers increasingly turn to multi-channel retailing, the opportunity to implement different pricing policies has grown. With the advent of the internet, many traditionally bargained products such as automobiles, jewelry, watches, appliances and furniture are now being offered online at a fixed pre-determined price. We explore the strategy of simultaneously offering two pricing formats (fixed and bargained) via two different channels (online and brick and mortar) and find that in a market where there are two types of consumers—those with a high cost of haggling and others with a lower cost—a dual-pricing strategy is optimal only when there are enough high haggling-cost consumers, but not too many, and when the haggling costs between the two types of consumers are sufficiently different. We also find that it is optimal for the seller to specify a higher-than-cost minimum acceptable price as the price floor of bargaining. By doing so, the seller increases the bargained price by complementing the salesperson's bargaining ability, and also softens the internal competition between the two channels. Finally, we find that, surprisingly, the dual-pricing strategy may serve fewer customers while still being more profitable than a single price structure. The implications for consumer surplus are also explored.

Cross-border electricity market effects due to price caps in an emission trading system: An agent-based approach

The recent low CO2 prices in the European Union Emission Trading Scheme (EU ETS) have triggered a discussion whether the EU ETS needs to be adjusted. We study the effects of CO2 price floors and a price ceiling on the dynamic investment pathway of two interlinked electricity markets (loosely based on Great Britain, which already has introduced a price floor, and on Central Western Europe). Using an agent-based electricity market simulation with endogenous investment and a CO2 market (including banking), we analyse the cross-border effects of national policies as well as system-wide policy options.A common, moderate CO2 auction reserve price results in a more continuous decarbonisation pathway. This reduces CO2 price volatility and the occurrence of carbon shortage price periods, as well as the average cost to consumers. A price ceiling can shield consumers from extreme price shocks. These price restrictions do not cause a large risk of an overall emissions overshoot in the long run. A national price floor lowers the cost to consumers in the other zone; the larger the zone with the price floor, the stronger the effect. Price floors that are too high lead to inefficiencies in investment choices and to higher consumer costs.

The Effects of a 'No-Haggle' Channel on Marketing Strategies

As sellers increasingly turn to multi-channel retailing, the opportunity to implement different pricing policies has grown. With the advent of the internet, many traditionally bargained products such as automobiles, jewelry, watches, appliances and furniture are now being offered online at a fixed pre-determined price. We explore the strategy of simultaneously offering two pricing formats (fixed and bargained) via two different channels (online and brick and mortar) and find that in a market where there are two types of consumers — those with a high cost of haggling and others with a lower cost — a dual-pricing strategy is optimal only when there are enough high haggling-cost consumers, but not too many, and when the haggling costs between the two types of consumers are sufficiently different. We also find that it is optimal for the seller to specify a higher-than-cost minimum acceptable price as the price floor of bargaining. By doing so, the seller increases the bargained price by complementing the salesperson’s bargaining ability, and also softens the internal competition between the two channels. Finally, we find that, surprisingly, the dual-pricing strategy may serve fewer customers while still being more profitable than a single price structure. The implications for consumer surplus are also explored.

Price Gap and Adjustment Weights Made Export Tax Easy

Treating both free trade tax and after export tax foreign prices as floor prices, this paper analyzes autarky, free trade, export tax for a small county. The findings are in terms of competitive three adjustment weights.

Using Floor Price Mechanisms to Promote Carbon Capture and Storage (Ccs) Investment and Co2 Abatement

The effect of an EU emission trading scheme (EU ETS) on CO2 abatement technology development is limited, according to many empirical studies. This is the result of an existing low carbon price and the future uncertainty of the development of the carbon market. Carbon price stabilisation mechanisms, especially the carbon price floor, may serve to supplement the ETS and cope with this problem. We are concerned with how the carbon price floor affects the investment in carbon abatement technology, the resulting CO2 abatement, and how to best design such a carbon floor price. In this paper, we focus on carbon capture and storage (CCS) technology by building a CCS investment and operation decision model based on real options theory. We consider investment timing and CCS operation flexibility and we also design a model for carbon price evolution with a carbon price floor using the Monte Carlo simulation method. We determine the floor prices above which immediate CCS investment is occuring, and those at which CO2 emissions can be eliminated. According to the simulation results, the carbon price floor has a significant effect on promoting CCS investment. The marginal effect of an increasing carbon price floor first rises and then falls; when the floor price reaches a threshold value, its marginal effect becomes minimal. Based on the simulation results, the carbon floor price for EU ETS could be set at about 20 EUR/t CO2 to stimulate the CCS investment, while it should be increased to 30 EUR/t CO2 to sufficiently promote CO2 abatement.

Climate policy, interconnection and carbon leakage: The effect of unilateral UK policy on electricity and GHG emissions in Ireland

This paper examines the effect of the UK's unilateral policy to implement a carbon price floor in Great Britain for fossil-fuel based electricity generation on the adjoining electricity market in Ireland. We find that, subject to efficient use of interconnectors between the two markets and constant imports from France and the Netherlands, a carbon price floor will lead to carbon leakage, with associated emissions in the Republic of Ireland increasing by 8% and electricity prices increasing by 2.4%. However, across the combined Irish and British electricity markets total emissions decline: high carbon prices drive decarbonisation in electricity generation. The UK's now implemented policy, which is a mechanism to directly manage carbon prices, substantially differs with the yet to be agreed EU policy response to postpone auctions of Emissions Trading Scheme allowances with the intention of indirectly increasing the price of carbon. The analysis suggests that the EU proposal will have only negligible additional effect on emissions from the combined Irish and UK electricity sectors.

Financial Intermediaries in the Midst of Market Manipulation: Did They Protect the Fool or Help the Knave?

We examine a fund manager's alleged manipulation of platinum and palladium futures settlement prices. Using benchmarks from parallel electronic markets, we find that the manager’s market-on-close trading causes significant settlement price artificiality. Defying predictions that competition among floor traders should limit any artificiality, the artificiality increases in the second half of the alleged manipulation period. Between 35% and 52% of the latter-period artificiality is directly attributable to noncompetitive floor prices. Inflated floor volume contributes a similar proportion to artificiality via the exchange’s trade-weighted settlement price formula. We estimate that floor counterparties reaped more than $6.0 million in excess profits.

The double benefits of consumer certainty: combining risk and range effects

We investigate consumer certainty as an important dimension of attitude strength and explore its influence on willingness to pay (WTP) ranges. WTP ranges are defined by two thresholds (floor/minimum and ceiling/maximum reservation price); their difference indicates the degree of (un)certainty. Across five studies (online, laboratory, and field experiments plus a field survey) with more than 25,000 participants, we find that increased consumer certainty generates an asymmetric shift in the WTP thresholds, such that the floor price increases more strongly than the ceiling price, which also implies a reduction in the WTP range. Consequently, this research specifies predictions offered by choice models that use Bayesian learning. The asymmetric effects appear, irrespective of the source of uncertainty, so our study advances understanding of whether consumers differ in their behavior as a consequence of preference or product performance uncertainty.

The dynamic impact of carbon reduction and renewable support policies on the electricity sector

Carbon reduction and renewable energy policies are implemented in Europe to improve the sustainability of the electricity sector while achieving security of supply. We investigate the interactions between these policies using a dynamic investment model. Our analysis indicates that both policies are necessary to achieve a sustainable power sector. However, renewable energy generation significantly affects carbon markets and could lead to very low prices. These would attract investments in carbon intensive technologies, locking the sector into future higher emissions. To contrast this effect, policy makers may introduce a floor price in the carbon market or adjust the emissions quota periodically.

When to invest in carbon capture and storage technology: A mathematical model

We present two models of the optimal investment decision in carbon capture and storage technology (CCS)—one where the carbon price is deterministic (based on the newly introduced carbon floor price in Great Britain) and one where the carbon price is stochastic (based on the ETS permit price in the rest of Europe). A novel feature of this work is that in both models investment costs are time dependent which adds an extra dimension to the decision problem. Our deterministic model allows for quite general dependence on carbon price and consideration of time to build and simple calculus techniques determine the optimal time to invest. We then analyse the effect of carbon price volatility on the optimal investment decision by solving a Bellman equation with an infinite planning horizon. We find that increasing the carbon price volatility increases the critical investment threshold and that adoption of this technology is not optimal at current prices, in agreement with other works. However reducing carbon price volatility by switching from carbon permits to taxes or by introducing a carbon floor as in Great Britain would accelerate the adoption of carbon abatement technologies such as CCS.

Market Reaction to the Karachi Stock Exchange Floor Imposition: Boom or Bane?

Purpose – The purpose of this paper is to investigate the market reaction to the decision made by the management of the Karachi Stock Exchange (KSE) to impose a price floor that resulted in trading curbs in 2008. The paper analyzes if regulatory intervention helped in restoring investor confidence.Design/methodology/approach – The paper examines the effect of enforcement of price floor and trading curbs by splitting the time period studied into two periods: pre-floor and post-floor period. The parametric t-statistics and non-parametric Mann-Whitney test are used to compare the abnormal returns (ARs), abnormal trading volume, bid-ask spread, Amihud illiquidity ratio, and price volatility between the two periods. Event study was conducted to observe the behavior of market returns surrounding market-wide price floor. Finally, multivariate regression analysis was also applied by controlling for factors that might influence valuation, liquidity, and volatility. The standard errors have been corrected for cross-sectional clustering due to market-wide restrictions.Findings – The study found an adverse impact of price freeze and trading curb in the KSE, following the relaxation of floor (resumption of active trading). First, the price of securities (or ARs) significantly declined following the relaxation of the price freeze. Second, the market liquidity deteriorated following the relaxation of the price floor. Third, the price volatility increased in the post-floor period. It seems that the decision made by the KSE’s board to implement lower cap on prices for an extended period was ineffective.Practical implications – Market intervention by regulators to bring calm in the financial markets have negative consequences across the globe. The results presented in this paper suggest that implementing price floor brought inefficiency in the market and prevented firms from raising capital to finance their future investments. The author believe this study will add to the knowledge base of regulatory intervention and its impact on the performance of financial markets.Originality/value – There is no empirical evidence on the impact of price limits on volatility in emerging markets. The author selected Pakistan as a case study, where we particularly focus upon impact of the enforcement of a price floor around the peak of Global Financial Crisis (or market intervention) in Pakistan. This study also documents the effect of trading curb on liquidity and volatility in an emerging market, given that a majority of research on trading halt/price limits is based on developed markets.

Environmental Outlook—Cap and Trade: Price Floors and Ceilings Crucial in Environmental Commodity Markets

AbstractFree markets are widely acknowledged to be the most efficient systems for allocation of scarce resources in an economy.

The impact of price floors on farmland investments: a real options based experimental analysis

Price floors are a common instrument for market intervention to stimulate investments. In some cases, it can be observed that a price floor does not have the stimulating effect. We experimentally analyse the investment behaviour of students who take the role of farmers. The experiment considers an investment problem under uncertainty in a ‘with price floor’ and a ‘no price floor’ treatment, stylizing a decision to take an ongoing farmland investment option. We compare the actual investment behaviour with normative benchmarks of the net present value and the real options approach. Furthermore, we look at order and learning effects. The results show that the price floor has no significant impact on the willingness to invest, whereas the effects of order were statistically significant. The investment reluctance arising from an abolishment is stronger than the investment stimulation arising from the introduction of a price floor. Furthermore, neither the net present value nor the real options approach is appropriate to predict the investment behaviour in general. Nevertheless, the predictions of the real options approach enable an approximation of the participants’ investment behaviour if the individuals have an adequate chance to learn from personal experience.

실물옵션을 활용한 고속 도로 유지관리 계약의 가치산정

최근 우리나라 도로 관련 국가 예산 편성을 살펴보면 신규 도로 건설에 대한 투자 보다는 유지관리에 대한 투자가 늘어가고 있는 것을 알 수 있다. 이로 인해 도로시설물에 대한 유지관리의 중요성이 점차 강조되고 있고 보다 효율적인 유지관리를 위해 해외의 도로 관련 정책이나 시스템을 도입해 가고 있다. 해외의 경우 도로 유지관리의 많은 부분은 민간업체와의 장기 계약을 통해 수행되고 있고 우리나라의 경우도 1년 단위 단기 유지관리계약에서 장기 계약으로 바꾸려고 하는 실정이다. 장기 유지관리 계약 확대를 위해 가장 중요한 요구사항은 정확한 유지관리비용 예측에 기반 한 계약금액의 산정과 계약당사자들의 위험 분배를 위한 제도적 장치이다. 이에 본 연구에서는 고속도로 유지관리 장기 계약의 정착을 위해 합리적인 계약 금액의 산정 방법을 제안하고 실물옵션을 활용하여 계약당사자들의 투자 위험을 적절히 분배할 수 있는 계약 체계를 제안하고자 한다. 제안된 계약체계를 20년 20km의 고속도로 유지관리 계약에 적용 시켜본 결과 각각 약 457억 원의 계약금액 그리고 600억 원과 423억 원의 실링과 플로어 조건을 산정할 수 있었다. The recent budget planning for highway infrastructure implied that the investments for Operation & Maintenance(O&M) became greater than that for new construction. This circumstance made many stakeholders pay attention to the O&M of road infrastructure and adopt other countries' policies and system for effective management. In other countries, most O&M for road infrastructure have been done by private entities using long-term contract and Korea is about to shift from one year contract to long-term contract. The most important parts for the expansion of the long-term O&M contract for road infrastructure are valuation of the O&M contract based on accurate prediction of O&M costs and instrument for proper risk sharing between contracting parties. Thus, this study provides a methodology to estimate a reasonable O&M contract price and a framework to share contract risk between contracting parties using real option. The analysis results showed that the contract price and ceiling and floor conditions for the 20 year-contract of 20 km-highway project were 45.7, 60 and 42.3 billion won, respectively.

Multi-commodity real options analysis of power plant investments: discounting endogenous risk structures

The value of power generation technologies can be derived from the investment cost, the plant’s expected lifetime, and the discounted cash flows, the latter of which typically are a combination of several underlyings, such as the price of fuel, electricity, and CO\(_2\). To determine this value, most studies assume predefined, uniform, and constant discount rates, irrespective of the fact that the specific risk strongly varies with the technology concerned and also over time. In order to endogenize the technology-specific risk, we develop a new model that explicitly accounts for the (likewise technology-specific) combination of the underlyings. More specifically, we use a multivariate binomial tree real options approach for analyzing the value of different power plants (gas-fired and coal-fired, with and without carbon capture and storage (CCS); hydro; wind; photovoltaics) and for taking into account technical change. We further investigate the influence of alternative CO\(_2\) policies on the plants’ values, modeling the CO\(_2\) price in three different ways and for three different carbon price levels (5, 25, 45 €/t\(_\mathrm{CO_2}\)): (1) as a stochastic process (geometric Brownian motion), reflecting the price development in the Emissions Trading Scheme of the European Union (EU ETS); (2) as a (constrained) stochastic process with a price floor, and (3) as a deterministic carbon tax. From the model application, using data from German exchange-based markets and a much-cited pilot study on future energy strategies and scenarios in Germany, we find a strong preference for hard-coal power plants in the low CO\(_2\) price scenario (\(P_{2015}=\) €5) and a low value of waiting in case of using the real options model. For all price scenarios, the value of waiting is much higher for both the CO\(_2\) permits with a price floor and the CO\(_2\) tax policy. This leads, for the medium and high CO\(_2\) price scenario, to a dominance of the CCS power plants. In the high CO\(_2\) price scenario (\(P_{2015}=\) €45), the value of waiting only delays the investment decision in the case of the floored CO\(_2\) permit prices. For the two other policies, the model predicts an immediate investment in CCS power plants once the CCS technology becomes commercially available in 2020.

The economics of CO2-EOR cluster developments in the UK Central North Sea

Studies to date have generally shown that individual CO2-EOR offshore projects are uneconomic except under questionable assumptions. The present study is based on an interconnected cluster of nine oilfields in the Central North Sea linked to an onshore CO2 collection hub by a set of existing and new pipelines. Monte Carlo simulation modelling was undertaken of the prospective returns to investments in CO2-EOR in the fields. Relatively high oil prices were employed for the study period (2020–2050) and two contrasting CO2 transfer price scenarios, the first being the Carbon Price Floor (CPF) introduced by the UK Government and the second being relatively low negotiated prices reflecting recent and prospective levels under the EU-ETS. At CPF prices the investment returns were all found to be negative, but at prices averaging £10 per tonne positive returns were generally achieved. The study emphasises the importance of CO2 prices and the taxation system in determining the viability of the investments.

Frameworks for pricing greenhouse gas emissions and the policy objectives they promote

Four cost-effective frameworks for pricing greenhouse gas emissions currently receive widespread attention: cap-and-trade, emission fees, and hybrid cap-and-trade approaches that include upper or lower limits on permit prices (price ceilings or floors). This paper develops a fifth framework that uses an emission fee with an upper limit on the quantity of emissions—a quantity ceiling—and compares the impact of each framework on emission prices and quantities. Cap-and-trade with a price ceiling minimizes price increases for emitting activities in all cases whereas an emission fee with a quantity ceiling maximizes emissions reductions. Thus, the choice of framework influences policy outcomes because each framework is more or less suited to particular policy goals. Whether pursuing one potential policy goal serves society's interests best depends on the eventual consequences of climate damage and emissions pricing, which are uncertain when policy choices are made. Policy updating over time may reduce but likely cannot entirely eliminate the differences in outcome that arise due to framework choice. Therefore, the “best” framework for emissions pricing depends on subjective preferences regarding the relative importance of different policy objectives, most notably whether one is more risk averse to climate damages or emissions price increases.