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In a new article published in the Journal of Environmental Economics and Management, Consultant Cameron Birchall, University of California, Davis Professor James N. Sanchirico, and University of Florida Assistant Professor Thomas M. Anderson examine how firms value flexibility in regulated markets in “Option Pricing in a Cap-and-Trade Market: Evidence from New Zealand Fisheries.”
Using evidence from New Zealand’s quota fisheries, the authors show that the value of tradable rights depends on the tenure of those rights. In particular, rights can command a premium when they provide firms with more time to align harvest decisions with favorable conditions, such as higher market prices.
The findings are highly relevant for many regulated markets that use regulation to address external costs and harms, including rights markets for air pollution, water, fisheries, and other natural resources. Many of these markets rely on tradable rights to balance commercial activity with public policy goals. The authors’ analysis shows that these rights may be priced not only for what they permit today but also for the strategic flexibility they can provide over time—an important consideration for policy design.
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