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Using the allocation of emission permits for strategic trade purposes

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  • Christos Constantatos
  • Eleftherios Filippiadis
  • Eftichios Sartzetakis

Abstract

We show that the presence of transaction costs in emission permit markets challenges the common presumption that grandfathering permits corresponds to lump-sum transfers with no strategic effects on output. Fixed transaction-costs influence firms’ decision to participate in the permits market, while variable transaction-costs affect firms’ output choice by creating a wedge between buyers’ and sellers’ opportunity cost of using permits. Thus, permit grandfathering can be used as a strategic trade instrument even when firms are price takers in the permit markets. Grandfathered permits differ from subsidies in that the stimulus they provide is bounded exogenously and rather limited. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Christos Constantatos & Eleftherios Filippiadis & Eftichios Sartzetakis, 2014. "Using the allocation of emission permits for strategic trade purposes," Journal of Regulatory Economics, Springer, vol. 45(3), pages 259-280, June.
  • Handle: RePEc:kap:regeco:v:45:y:2014:i:3:p:259-280
    DOI: 10.1007/s11149-014-9244-0
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    More about this item

    Keywords

    Tradable emissions permits; Strategic trade policy; D4; F1; Q5; Q58;
    All these keywords.

    JEL classification:

    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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