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Does emission permit allocation affect CO2 cost pass-through? A theoretical analysis

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  • Wang, M.
  • Zhou, P.

Abstract

Carbon emissions trading may result in CO2 cost pass-through and its rate is influenced by a number of factors. This paper theoretically investigates how emission permit allocation affects CO2 cost pass-through rate by developing a Nash-Cournot oligopolistic market equilibrium model. We find that the derived CO2 cost pass-through rates are consistent when grandfathering and auctioning rules are used for permit allocation, which are higher than that for benchmarking rule. It has also been found that the magnitude of CO2 cost pass-through rate is relevant to the type of definition, product market structure and average carbon intensity of the industry. We suggest that policy makers first use benchmarking rule to attract firms to participate at the early stage of emissions trading system (ETS) and then take auctioning rule when ETS is well developed.

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  • Wang, M. & Zhou, P., 2017. "Does emission permit allocation affect CO2 cost pass-through? A theoretical analysis," Energy Economics, Elsevier, vol. 66(C), pages 140-146.
    • Handle: RePEc:eee:eneeco:v:66:y:2017:i:c:p:140-146
    DOI: 10.1016/j.eneco.2017.06.011
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    5. Joltreau, Eugénie & Sommerfeld, Katrin, 2016. "Why does emissions trading under the EU ETS not affect firms' competitiveness? Empirical findings from the literature," ZEW Discussion Papers 16-062, ZEW - Leibniz Centre for European Economic Research.
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    10. Qunwei Wang & Cheng Cheng & Dequn Zhou, 2020. "Multi-round auctions in an emissions trading system considering firm bidding strategies and government regulations," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 25(7), pages 1403-1421, October.
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    More about this item

    Keywords

    Emissions trading; Cost pass-through; Cournot oligopoly; Permit allocation; Market structure;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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