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Market Power in Laboratory Emission Permit Markets

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  • Robert Godby

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Abstract

Many proposals suggesting the use of markets tocontrol pollution assume markets will becompetitive. When markets do not exhibitcompetitive characteristics, however, shouldthey still be expected to result in efficiencyimprovement relative to traditional approaches? This paper employs experimental economicmethods to examine the effect of marketstructure on the use of marketable emissionspermits. Results indicate that in a market withone dominant firm and a number of fringe firms,strategic manipulation occurs repeatedly in thelaboratory as predicted by market power models,undermining the allocative and dynamicefficiency benefits such markets offer. Whenfirms compete in a downstream product marketdominated by the same single firm, marketefficiency can actually be reduced with theimplementation of permit markets. Final marketefficiencies reflect initial endowments and areinfluenced by competitive conditions elsewherein the economy, indicating that policy-makersshould carefully consider whether markets areappropriate in such circumstances. Copyright Kluwer Academic Publishers 2002

Suggested Citation

  • Robert Godby, 2002. "Market Power in Laboratory Emission Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 23(3), pages 279-318, November.
  • Handle: RePEc:kap:enreec:v:23:y:2002:i:3:p:279-318
    DOI: 10.1023/A:1021263009621
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    References listed on IDEAS

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    1. R. Andrew Muller & Stuart Mestelman, 1998. "What have we learned from emissions trading experiments?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 225-238.
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    Cited by:

    1. Hintermann, Beat & Peterson, Sonja & Rickels, Wilfried, 2014. "Price and market behavior in Phase II of the EU ETS," Kiel Working Papers 1962, Kiel Institute for the World Economy (IfW).
    2. Itkonen, Juha, 2009. "Päästökauppajärjestelmien linkittämisen ilmastopoliittiset vaikutukset
      [Linking emissions trading systems and climate policy]
      ," MPRA Paper 30171, University Library of Munich, Germany.
    3. Anthony Heyes, 2009. "Is environmental regulation bad for competition? A survey," Journal of Regulatory Economics, Springer, vol. 36(1), pages 1-28, August.
    4. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    5. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.
    6. Rubin, Jonathan & Leiby, Paul N. & Greene, David L., 2009. "Tradable fuel economy credits: Competition and oligopoly," Journal of Environmental Economics and Management, Elsevier, vol. 58(3), pages 315-328, November.
    7. Beat Hintermann, 2013. "Market Power in Emission Permit Markets: Theory and Evidence," CESifo Working Paper Series 4447, CESifo Group Munich.
    8. Beat Hintermann, 2017. "Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(1), pages 89-112, January.

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