Title: Hedging in Coal Contracts under the Acid Rain Program.

Abstract

Tradable permit schemes introduce uncertainty into the pricing of fuel due to their embedded pollution content. Regulated firms can hedge this uncertainty through their contracts for fuel procurement.  Data on coal contracts in the U.S. are used to estimate how the option not to be delivered higher sulfur coal is priced.  Results find that under a tradable permit scheme coal prices fell by value equivalent to $170 per ton of sulfur dioxide for a one ton increase in the sulfur upper bound specified in the contract, compared to a $78 per ton discount for increased delivered sulfur content.