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On Pollution Permit Banking and Market Power

Author

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  • Matti Liski
  • Juan-Pablo Montero

Abstract

We consider a pollution permit market with a large firm and fringe of competitive firms. To smooth compliance towards a long-run emissions goal, firms are initially allocated a stock (i.e., bank) of permits that can be gradually consumed. We first show how the large firm can credibly manipulate the spot market in subgame-perfect equilibrium. Motivated by features observed in the US market for sulfur dioxide emissions, we then show that the introduction of stock transactions has no effects on market power, but that forward trading and incomplete observability of stock holdings do have pro-competitive effects. Copyright Springer Science+Business Media, Inc. 2006

Suggested Citation

  • Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, vol. 29(3), pages 283-302, May.
    • Handle: RePEc:kap:regeco:v:29:y:2006:i:3:p:283-302
    DOI: 10.1007/s11149-006-7400-x
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    References listed on IDEAS

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    1. Bernard, Alain & Paltsev, Sergey & Reilly, John L. & Vielle, Marc & Viguier, Laurent, 2003. "Russia's Role in the Kyoto Protocol," IDEI Working Papers 237, Institut d'Économie Industrielle (IDEI), Toulouse.
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    More about this item

    Keywords

    Pollution permits; Market power; Banking; L51; Q28;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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