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Intertemporal Emissions Trading and Market Power: A Dominant Firm with Competitive Fringe Model

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  • Julien Chevallier

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

Abstract

In international emissions trading schemes such as the Kyoto Protocol and the European Union Emissions Trading Scheme, the suboptimal negotiation of the cap with respect to total pollution minimization leads us to critically examine the proposition that generous allocation of grandfathered permits by the regulator based on recent emissions might pave the way for dominant positions. Stemming from this politically given market imperfection, this chapter develops a differential Stackelberg game with two types of non cooperative agents: a large potentially dominant agent, and a competitive fringe whose size are exogenously determined. The strategic interactions are modeled on an intra-industry permits markets where agents can freely bank and borrow permits. This chapter contributes to the debate on initial permits allocation and market power by focusing on the effects of allowing banking and borrowing. A documented appraisal on whether or not such provisions should be included is frequently overlooked by the debate to introduce the permits market itself among other environmental regulation tools. Numerical simulations provide a quantitative illustration of the results obtained.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00388207.

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Date of creation: 26 May 2009
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Handle: RePEc:hal:wpaper:halshs-00388207

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Keywords: Emissions Trading; Banking; Borrowing; Market Power.;

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  1. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
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  18. Julien Chevallier & Johanna Etner & Pierre-André Jouvet, 2008. "Bankable Pollution Permits under Uncertainty and Optimal Risk Management Rules: Theory and Empirical Evidence," EconomiX Working Papers 2008-25, University of Paris West - Nanterre la Défense, EconomiX.
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