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Emissions Trading with Profit-Neutral Permit Allocations

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Author Info

  • Cameron Hepburn

    ()
    (School of Enterprise and the Environment, Oxford University)

  • John K.-H. Quah

    ()
    (Department of Economics, Oxford University)

  • Robert A. Ritz

    ()
    (Department of Economics, Oxford University)

Abstract

This paper examines the operation of an emissions trading scheme (ETS) in a Cournot oligopoly. We study the impact of the ETS on industry output, price, costs, emissions, and profits. In particular, we develop formulae for the number of emissions permits that have to be freely allocated to firms in order to neutralize any adverse impact the ETS may have on profits. These formulae tell us that the profit impact of the ETS is usually limited. Indeed, under quite general conditions, industry profits are preserved so long as firms are freely allocated a fraction of their total demand for permits, with this fraction being lower than the industry's Herfindahl index.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2008/w12/HQR2-8.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2008-W12.

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Length: 41 pages
Date of creation: 11 Mar 2008
Date of revision:
Handle: RePEc:nuf:econwp:0812

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Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: Emissions trading; permit allocation; profit-neutrality; cost pass-through; abatement; grandfathering;

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References

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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. 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.
  3. 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.
  4. 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.
  5. 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.
  6. repec:pdn:wpaper:80 is not listed on IDEAS

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