Competitive Permit Markets and Vertical Structures: The Relevance of Imperfect Competitive Eco-Industries
AbstractPermit markets lead polluting firms to purchase abatement goods from an eco-industry, which is often concentrated. This paper studies the consequences of imperfect competition in an eco-industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second best pollution cap. By comparing this situation to a competitive one, we show that Cournot competition on the abatement good market contributes not only to a non optimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power measured by the margin taken by the non competitive firms and suggest a second best less stringent pollution cap
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Date of creation: 12 Jul 2010
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pollution permit market; eco-industry; imperfect competition;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-24 (All new papers)
- NEP-COM-2010-07-24 (Industrial Competition)
- NEP-ENE-2010-07-24 (Energy Economics)
- NEP-ENV-2010-07-24 (Environmental Economics)
- NEP-REG-2010-07-24 (Regulation)
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