Emissions trading is becoming increasingly popular in environmental law. Allowances to trade emissions can either be auctioned off or handed out free of charge by means of grandfathering. Although grandfathering is frequently used in emissions trading schemes, it is a popular view in the...

We compare a carbon tax and a cap and trade mechanism in their propensity to induce carbon-reducing technological adoption, when investments are undertaken under uncertainty. In our setting, risk-neutral firms affect the variance and the correlation of the shocks they are exposed to through...