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Optimal Allocation of Tradable Pollution Rights and Market Structures

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  • Dafna Eshel

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    Abstract

    Tradable environmental rights are increasingly pursed as a regulatory instrument, to control for environmental quality. However, in the presence of market power, regulation through an allocation of tradable rights generally yield inefficient outcomes. This article analyzes the effect of the initial distribution of tradable rights on the firms’ strategies and performance in abatement and production, and proposes an efficient criterion for the allocation of tradable rights among firms with market power and competitive fringe firms. The suggested criterion maximizes efficiency of the market based regulation. A simple numerical example illustrates the theoretical discussion. Copyright Springer Science+Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11149-005-3109-5
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 28 (2005)
    Issue (Month): 2 (09)
    Pages: 205-223

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    Handle: RePEc:kap:regeco:v:28:y:2005:i:2:p:205-223

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    Web page: http://www.springerlink.com/link.asp?id=100298

    Related research

    Keywords: Tradable pollution rights; allocation efficiency; environmental policy; L130; Q580; Q520;

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    1. Newell, Richard G. & Sanchirico, James N. & Kerr, Suzi, 2005. "Fishing quota markets," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 437-462, May.
    2. Hanley Hanley, 1992. "Efficiency and Distributional Aspects of Market Mechanisms in the Control of Pollution: An Empirical analysis," Working Papers 842, Queen's University, Department of Economics.
    3. Fershtman,C. & de Zeeuw,A., 1995. "Tradeable Emission Permits in Oligopoly," Papers 45-95, Tel Aviv - the Sackler Institute of Economic Studies.
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    Cited by:
    1. Li, Shoude, 2013. "Emission permit banking, pollution abatement and production–inventory control of the firm," International Journal of Production Economics, Elsevier, vol. 146(2), pages 679-685.
    2. Beat Hintermann, 2013. "Market Power in Emission Permit Markets: Theory and Evidence," CESifo Working Paper Series 4447, CESifo Group Munich.
    3. Slechten, Aurélie, 2013. "Intertemporal links in cap-and-trade schemes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 319-336.
    4. SANIN, Maria Eugenia & ZANAJ, Skerdilajda, 2007. "Environmental innovation under Cournot competition," CORE Discussion Papers 2007050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Knut Rosendahl & Halvor Storrøsten, 2011. "Emissions Trading with Updated Allocation: Effects on Entry/Exit and Distribution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(2), pages 243-261, June.
    6. Guy Meunier, 2011. "Emission Permit Trading Between Imperfectly Competitive Product Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 50(3), pages 347-364, November.
    7. Li, Shoude & Gu, Mengdi, 2012. "The effect of emission permit trading with banking on firm's production–inventory strategies," International Journal of Production Economics, Elsevier, vol. 137(2), pages 304-308.
    8. Tanaka, Makoto & Chen, Yihsu, 2013. "Market power in renewable portfolio standards," Energy Economics, Elsevier, vol. 39(C), pages 187-196.
    9. Julien Bueb & Sonia Schwartz, 2011. "Strategic manipulation of a pollution permit market and international trade," Journal of Regulatory Economics, Springer, vol. 39(3), pages 313-331, June.
    10. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.
    11. Christoph Böhringer & Knut Einar Rosendahl, 2008. "Strategic Partitioning of Emissions Allowances. Under the EU Emission Trading Scheme," Discussion Papers 538, Research Department of Statistics Norway.
    12. Bonacina, Monica & Gulli`, Francesco, 2007. "Electricity pricing under "carbon emissions trading": A dominant firm with competitive fringe model," Energy Policy, Elsevier, vol. 35(8), pages 4200-4220, August.
    13. Jaehn, Florian & Letmathe, Peter, 2010. "The emissions trading paradox," European Journal of Operational Research, Elsevier, vol. 202(1), pages 248-254, April.
    14. Chung, Sung H. & Weaver, Robert D. & Friesz, Terry L., 2012. "Oligopolies in pollution permit markets: A dynamic game approach," International Journal of Production Economics, Elsevier, vol. 140(1), pages 48-56.

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