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On the Efficiency of Competitive Markets for Emission Permits

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  • Eftichios Sartzetakis

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Abstract

It is typical for economists andpolicy makers alike to presume that competitivemarkets allocate emission permits efficiently.This paper demonstrates that competition in theemission permits market cannot assureefficiency when the product market isoligopolistic. We provide the conditions underwhich a bureaucratic mechanism is welfaresuperior to a tradeable emission permitssystem. Price-taking behaviour in the permitsmarket ensures transfer of licenses to the lessefficient in abatement firms, which then becomemore aggressive in the product market,acquiring additional permits. As a result, theless efficient firms end up with a higher thanthe welfare maximizing share of emissionpermits. If the less efficient in abatementfirms are also less efficient in production,competitive trading of permits may result inlower output and welfare. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Eftichios Sartzetakis, 2004. "On the Efficiency of Competitive Markets for Emission Permits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 27(1), pages 1-19, January.
  • Handle: RePEc:kap:enreec:v:27:y:2004:i:1:p:1-19
    DOI: 10.1023/B:EARE.0000016786.09344.d4
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    References listed on IDEAS

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    1. Eftichios Sartzetakis, 1997. "Tradeable emission permits regulations in the presence of imperfectly competitive product markets: Welfare implications," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 9(1), pages 65-81, January.
    2. Ngo Van Long & Antoine Soubeyran, 2000. "Permis de pollution et oligopole asymétrique," Économie et Prévision, Programme National Persée, vol. 143(2), pages 83-89.
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    4. Fershtman,C. & de Zeeuw,A., 1995. "Tradeable Emission Permits in Oligopoly," Papers 45-95, Tel Aviv - the Sackler Institute of Economic Studies.
    5. Nils-Henrik Mørch von der Fehr, 1993. "Tradable emission rights and strategic interaction," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 3(2), pages 129-151, April.
    6. Spencer, Barbara J., 1997. "Quota licenses for imported capital equipment: Could bureaucrats ever do better than the market?," Journal of International Economics, Elsevier, vol. 43(1-2), pages 1-27, August.
    7. James A. Brander & Barbara J. Spencer, 1983. "Strategic Commitment with R&D: The Symmetric Case," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 225-235, Spring.
    8. Gérard Gaudet & Stephen W. Salant, 1991. "Uniqueness of Cournot Equilibrium: New Results From Old Methods," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 399-404.
    9. Severin Borenstein, 1988. "On the Efficiency of Competitive Markets for Operating Licenses," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 357-385.
    10. Nishimura, Kazuo & Friedman, James, 1981. "Existence of Nash Equilibrium in n Person Games without Quasi-Concavity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 637-648, October.
    11. Malueg, David A., 1990. "Welfare consequences of emission credit trading programs," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 66-77, January.
    12. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
    13. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
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    Citations

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    Cited by:

    1. Creti, Anna & Sanin, María-Eugenia, 2017. "Does environmental regulation create merger incentives?," Energy Policy, Elsevier, vol. 105(C), pages 618-630.
    2. Lozano, S. & Villa, G. & Brännlund, R., 2009. "Centralised reallocation of emission permits using DEA," European Journal of Operational Research, Elsevier, vol. 193(3), pages 752-760, March.
    3. Harrie A.A. Verbon & Cees A. Withagen, 2004. "Tradable emission permits in a federal system," Economic Working Papers at Centro de Estudios Andaluces E2004/83, Centro de Estudios Andaluces.
    4. Phoebe Koundouri & Fabio Antoniou & Panos Hatzipanayotou, 2009. "Tradable Permits vs Ecological Dumping," DEOS Working Papers 1002, Athens University of Economics and Business.
    5. Robert W. Hahn & Robert N. Stavins, 2011. "The Effect of Allowance Allocations on Cap-and-Trade System Performance," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 267-294.
    6. Hatcher, Aaron, 2012. "Market power and compliance with output quotas," Resource and Energy Economics, Elsevier, vol. 34(2), pages 255-269.
    7. Cotton, Deborah & De Mello, Lurion, 2014. "Econometric analysis of Australian emissions markets and electricity prices," Energy Policy, Elsevier, vol. 74(C), pages 475-485.
    8. Julien Chevallier, 2009. "Intertemporal Emissions Trading and Market Power: A Dominant Firm with Competitive Fringe Model," Working Papers halshs-00388207, HAL.
    9. Guy Meunier, 2011. "Emission Permit Trading Between Imperfectly Competitive Product Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(3), pages 347-364, November.
    10. Sang-Ho Lee & Sang-Ha Park, 2005. "Tradable Emission Permits Regulations: The Role of Product Differentiation," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 4(3), pages 249-261, December.
    11. André, Francisco J. & de Castro, Luis Miguel, 2015. "Scarcity Rents and Incentives for Price Manipulation in Emissions Permit Markets with Stackelberg Competition," MPRA Paper 61770, University Library of Munich, Germany.
    12. repec:dau:papers:123456789/4228 is not listed on IDEAS
    13. Julien Chevallier, 2009. "Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power," Working Papers halshs-00124713, HAL.
    14. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc.

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