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Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power

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  • Julien Chevallier

    ()
    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

Abstract

Stemming from politically given market imperfections in a tradable permits system, this paper develops a Stackelberg game with two types of non-cooperative agents to describe how a large -potentially dominant- agent may exercise market power at the expense of a competitive fringe. In a dynamic framework with full forward and backward temporal flexibility (i.e. 1:1 Intertemporal Trading Ratio), this intra-industry model then suggests an optimal allocation criterion for grandfathered permits based on recent emissions. This paper contributes to the permit trading literature by shedding some light on the decision to allow banking and borrowing, a debate which is typically overlooked by the debate to introduce the permits market itself among other environmental regulation tools. Provisional results are presented under perfect information.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00124713.

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Date of creation: 15 Jan 2009
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Handle: RePEc:hal:wpaper:halshs-00124713

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Related research

Keywords: emissions trading; banking; borrowing; market power; differential game;

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  1. Christoph Böhringer & Ulf Moslener & Bodo Sturm, 2007. "Hot air for sale: a quantitative assessment of Russia’s near-term climate policy options," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(4), pages 545-572, December.
  2. Pierre-André Jouvet & Philippe Michel & Gilles Rotillon, 2004. "Optimal growth with pollution : how to use pollution permits ?," Cahiers de la Maison des Sciences Economiques v04012, Université Panthéon-Sorbonne (Paris 1).
  3. Gernot Klepper & Sonja Peterson, 2002. "Trading Hot Air The Influence of Permit Allocation Rules, Market Power and the US Withdrawal from the Kyoto Protocol," Kiel Working Papers 1133, Kiel Institute for the World Economy.
  4. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Matti Liski & Juan-Pablo Montero, 2005. "A Note on Market Power in an Emission Permits Market with Banking," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 159-173, 06.
  6. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, vol. 29(3), pages 283-302, 05.
  7. Juan-Pablo Montero, 2002. "The Temporal Efficiency of SO2 Emissions Trading," Documentos de Trabajo 225, Instituto de Economia. Pontificia Universidad Católica de Chile..
  8. Matti Liski & Juan-Pablo Montero, 2005. "Market Power in a Storable-Good Market: Theory and Applications to Carbon and Sulfur Trading," Documentos de Trabajo 304, Instituto de Economia. Pontificia Universidad Católica de Chile..
  9. Charles Kolstad, 2005. "Piercing the Veil of Uncertainty in Transboundary Pollution Agreements," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(1), pages 21-34, 05.
  10. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, 06.
  11. Christoph BOhringer & Andreas LOschel, 2003. "Market power and hot air in international emissions trading: the impacts of US withdrawal from the Kyoto Protocol," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 651-663.
  12. Eftichios Sartzetakis, 2004. "On the Efficiency of Competitive Markets for Emission Permits," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 27(1), pages 1-19, January.
  13. Petrakis, Emmanuel & Xepapadeas, Anastasios, 2003. "Location decisions of a polluting firm and the time consistency of environmental policy," Resource and Energy Economics, Elsevier, vol. 25(2), pages 197-214, May.
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