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Emissions Trading with Profit-Neutral Permit Allocations

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  • Hepburn, C.J.
  • Quah, J.K.-H.
  • Ritz, R.A.

Abstract

This paper examines the impact of an emissions trading scheme (ETS) on equilibrium emissions, output, price, market concentration, and profits in a generalized Cournot model. We develop formulae for the number of emissions permits that have to be freely allocated to firms to neutralize the profit impact of the ETS. We show that its profit impact is usually limited: in a Cournot oligopoly with constant marginal costs, total industry profits are preserved so long as freely allocated permits cover a fraction of initial emissions that does not exceed the industry's Herfindahl index.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1235.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1235.

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Date of creation: 17 Aug 2012
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Handle: RePEc:cam:camdae:1235

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Cap-and-trade; permit allocation; profit-neutrality; cost pass-through; abatement; grandfathering;

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Citations

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Cited by:
  1. Schmidt, Robert C. & Heitzig, Jobst, 2014. "Carbon leakage: Grandfathering as an incentive device to avert firm relocation," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 209-223.
  2. Dieter Helm & Cameron Hepburn & Giovanni Ruta, 2012. "Trade, climate change, and the political game theory of border carbon adjustments," Oxford Review of Economic Policy, Oxford University Press, vol. 28(2), pages 368-394, SUMMER.
  3. repec:pdn:wpaper:80 is not listed on IDEAS
  4. Robert A. Ritz, 2009. "Carbon leakage under incomplete environmental regulation: An industry-level approach," Economics Series Working Papers 461, University of Oxford, Department of Economics.
  5. Samuel Fankhauser & Cameron Hepburn & Jisung Park, 2011. "Combining multiple climate policy instruments: how not to do it," Grantham Research Institute on Climate Change and the Environment Working Papers 38, Grantham Research Institute on Climate Change and the Environment.
  6. Clémence Christin & Jean-Philippe Nicolai & Jerome Pouyet, 2013. "Pollution Permits, Imperfect Competition and Abatement Technologies," CER-ETH Economics working paper series 13/186, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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