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Emissions Trading with Profit-Neutral Permit Allocations

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Author Info

  • 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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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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References

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Cited by:
  1. 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.

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