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Pollution Permits and the Evolution of Market Structure

Author

Listed:
  • Stephen P. Ryan

    (MIT)

  • Mar Reguant

    (MIT)

  • Meredith Fowlie

    (UC-Berkeley)

Abstract

We explore the long run dynamic implications of subjecting an imperfectly competitive industry to market-based pollution regulation. We are particularly interested in understanding how the allocation of emissions permits in a cap-and-trade program can influence the evolution of a trade exposed oligopolistic industry. Using two decades of panel data on the US Portland cement industry, we estimate a fully dynamic model of firms’ strategic entry, exit, production, and investment decisions. We then use the model to simulate counterfactual outcomes under three general classes of allocation regimes: auctioning, grandfathering, and contingent updating. We find that the dynamic evolution of market structure can vary significantly across the policy scenarios we consider. We quantify the overall costs of achieving desired emissions reductions and the distribution of those costs.

Suggested Citation

  • Stephen P. Ryan & Mar Reguant & Meredith Fowlie, 2011. "Pollution Permits and the Evolution of Market Structure," 2011 Meeting Papers 1440, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1440
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    2. Panle Jia Barwick & Parag A. Pathak, 2015. "The costs of free entry: an empirical study of real estate agents in Greater Boston," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 103-145, March.

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