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Market Power in Pollution Permit Markets

  • Juan-Pablo Montero

As with other commodity markets, markets for trading pollution permits have not been immune to market power concerns. In this paper, I survey the existing literature on market power in permit trading but also contribute with some new results and ideas. I start the survey with Hahn’s (1984) dominant-firm (static) model that I then extend to the case in which there are two or more strategic firms that may also strategically interact in the output market, to the case in which current permits can be stored for future use (as in most existing and proposed market designs), to the possibility of collusive behavior, and to the case in which permits are auctioned off instead of allocated for free to firms. I finish the paper with a review of empirical evidence on market power, if any, with particular attention to the U.S. sulfur market and the Southern California NOx market.

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Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 30 (2009)
Issue (Month): Special Issue #2 ()

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Handle: RePEc:aen:journl:2009se-climate-change-a06
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  1. Morch von der Fehr, N-H., 1991. "Tradable Emission Rights and Strategic Interaction," Memorandum 11/1991, Oslo University, Department of Economics.
  2. van Egteren, Henry & Weber, Marian, 1996. "Marketable Permits, Market Power, and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 161-173, March.
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