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Market Power with Interdependent Demand: Sale of Emission Permits and Natural Gas from Russia

  • Cathrine Hagem
  • Steffen Kallbekken

    ()

  • Ottar Mæstad
  • Hege Westskog

With implementation of the Kyoto Protocol, Russia will most likely be able to exert market power in the emission permit market. But, as Russia is also a big exporter of fossil fuels, the incentives to boost the permit price may be weak. However, a significant share of Russia’s fossil fuel exports is natural gas. If a high permit price boosts the demand for natural gas through substitution from more polluting fuels and thus increase gas profits, this may increase the incentives to exert monopoly power in the permit market. Moreover, a large fossil fuel exporter may use its market position to influence the effective demand for permits. Hence, the relationship between permit income and fossil fuels exports runs in both directions. In this article, we explore the interdependence between the revenues from permit and fossil fuel exports both theoretically and numerically. A computable general equilibrium model suggests the fact that Russia as a big gas exporter has small effect on the incentives to exert monopoly power in the permit market. Moreover, Russia’s monopoly power in the permit market has a small, but non-negligible impact on the optimal level of Russian gas exports. Copyright Springer 2006

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File URL: http://hdl.handle.net/10.1007/s10640-005-6206-0
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Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 34 (2006)
Issue (Month): 2 (06)
Pages: 211-227

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Handle: RePEc:kap:enreec:v:34:y:2006:i:2:p:211-227
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  1. Steffen Kallbekken & Hege Westskog, 2005. "Should Developing Countries Take on Binding Commitments in a Climate Agreement? An Assessment of Gains and Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 41-60.
  2. J. E. Stiglitz, 1999. "Introduction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 249-254, November.
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