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Market Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits

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  • Matti Liski
  • Juan‐Pablo Montero

Abstract

Motivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to an agent, or a group of agents, in a position to exercise market power. A large seller of permits exercises market power no differently than a large supplier of an exhaustible resource. However, whenever the large agent's endowment falls short of his efficient endowment – allocation profile that would exactly cover his emissions along the perfectly competitive path – market power is greatly mitigated by a commitment problem, much like in a durable-goods monopoly. We illustrate our theory with two applications: the US sulphur market and the international carbon market that may eventually develop beyond the Kyoto Protocol.

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File URL: http://hdl.handle.net/10.1111/j.1468-0297.2010.02366.x
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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 551 (March)
Pages: 116-144

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:551:p:116-144

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  1. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  2. A. Denny Ellerman & Juan-Pablo Montero, 2005. "The Efficiency and Robustness of Allowance Banking in the U.S. Acid Rain Program," Working Papers 0505, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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  11. Juan-Pablo Montero, 1999. "Voluntary Compliance with Market-Based Environmental Policy: Evidence from the U.S. Acid Rain Program," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 998-1033, October.
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Cited by:
  1. Juan-Pablo Montero, 2009. "Market Power in Pollution Permit Markets," Working Papers 0906, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Juan-Pablo Montero, 2011. "Cuotas de Pesca y Libre Competencia: Algunas Reflexiones para la Nueva Ley de Pesca," Documentos de Trabajo 405, Instituto de Economia. Pontificia Universidad Católica de Chile..

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