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Stochastic Pollution, Permits, and Merger Incentives

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  • Hennessy, David A.
  • Roosen, Jutta

Abstract

Pollution permit regulations introduce nonlinearities into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production. We also demonstrate that permit management incentives may motivate a merger of otherwise independent firms. Incentives to petition for "bubble" coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situations in the output and permit markets are also analyzed. Author Keywords: bubble; Cournot; covariation; mergers; stochastic pollution; tradeable permits
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  • Hennessy, David A. & Roosen, Jutta, 1999. "Stochastic Pollution, Permits, and Merger Incentives," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 211-232, May.
    • Handle: RePEc:eee:jeeman:v:37:y:1999:i:3:p:211-232
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    Cited by:

    1. Joan Canton & Maia David & Bernard Sinclair-Desgagné, 2007. "Environmental regulation and mergers within the eco-industry," Working Papers 2007/01, INRA, Economie Publique.
    2. Hennessy, David A. & Wei, Wei, 2000. "Decisions and tradable production quota when yield is uncertain," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 44(2), pages 1-15.
    3. Dijkstra, Bouwe R. & Rübbelke, Dirk T.G., 2013. "Group rewards and individual sanctions in environmental policy," Resource and Energy Economics, Elsevier, vol. 35(1), pages 38-59.
    4. Lin-Ti Tan, 2005. "Spatial Economic Theory of Pollution Control under Stochastic Emissions," IEAS Working Paper : academic research 05-A009, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    5. Creti, Anna & Sanin, María-Eugenia, 2017. "Does environmental regulation create merger incentives?," Energy Policy, Elsevier, vol. 105(C), pages 618-630.
    6. Choi, Pak-Sing & Espínola-Arredondo, Ana & Muñoz-García, Félix, 2022. "Environmental policy helping antitrust decisions: Socially excessive and insufficient merger approvals," Resource and Energy Economics, Elsevier, vol. 67(C).
    7. Akira Maeda, 2004. "Impact of banking and forward contracts on tradable permit markets," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 6(2), pages 81-102, June.
    8. Canton, Joan & David, Maia & Sinclair-Desgagné, Bernard, 2012. "Environmental Regulation and Horizontal Mergers in the Eco-industry," Strategic Behavior and the Environment, now publishers, vol. 2(2), pages 107-132, July.
    9. Doda, Baran & Quemin, Simon & Taschini, Luca, 2019. "Linking permit markets multilaterally," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    10. Baran Doda & Simon Quemin & Luca Taschini, 2017. "A Theory of Gains from Trade in Multilaterally Linked ETSs," Working Papers 1706, Chaire Economie du climat.
    11. Creti, Anna & Villeneuve, Bertrand, 2008. "Equilibrium Storage in a Markov Economy," MPRA Paper 11944, University Library of Munich, Germany.
    12. L. Lambertini & A. Tampieri, 2012. "Efficient Horizontal Mergers in Polluting Industries with Cournot Competition," Working Papers wp813, Dipartimento Scienze Economiche, Universita' di Bologna.
    13. Karl-Martin Ehrhart & Christian Hoppe & Ralf Löschel, 2008. "Abuse of EU Emissions Trading for Tacit Collusion," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(3), pages 347-361, November.
    14. Olivier Rousse & Benoît Sévi, 2005. "Behavioral Heterogeneity in the US Sulfur Dioxide Emissions Allowance Trading Program," ERSA conference papers ersa05p550, European Regional Science Association.
    15. Holland, Stephen P. & Moore, Michael R., 2013. "Market design in cap and trade programs: Permit validity and compliance timing," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 671-687.
    16. repec:dau:papers:123456789/2280 is not listed on IDEAS
    17. Innes, Robert, 2003. "Stochastic pollution, costly sanctions, and optimality of emission permit banking," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 546-568, May.
    18. Choi, Pak-Sing & Espinola-Arredondo, Ana & Munoz, Felix, 2020. "Mergers as an environmental ally: Socially excessive and insufficient merger approvals," Working Papers 2020-1, School of Economic Sciences, Washington State University.
    19. Akira Maeda, 2004. "Impact of banking and forward contracts on tradable permit markets," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 6(2), pages 81-102, June.

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