<Para ID="Par1">The electricity generation mix of many countries is strongly dominated by fossil fuelled power plants. <InlineEquation ID="IEq1"> <EquationSource Format="TEX">$$\hbox {CO}_{2}$$</EquationSource> <EquationSource Format="MATHML"> <math xmlns:xlink="http://www.w3.org/1999/xlink"> <msub> <mtext>CO</mtext> <mn>2</mn> </msub> </math> </EquationSource> </InlineEquation> certificate trading is then advocated as a first best instrument for emission abatement in Europe, the US and beyond. An important element of the trading scheme...</equationsource></equationsource></inlineequation></para>

We analyze the treatment and impact of idiosyncratic or firm-specific risk in regulation. Regulatory authorities regularly ignore firm-specific characteristics, such as size or asset ages, implying different risk exposure in incentive regulation. In contrast, it is common to apply only a single...