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Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly

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Listed:
  • Calford, Evan M.
  • Heinzel, Christoph
  • Betz, Regina

Abstract

We analyse the efficiency effects of the initial permit allocation given to firms with market power in both permit and output market. We examine two models: a long- run model with endogenous technology and capacity choice, and a short-run model with fixed technology and capacity. In the long run, quantity pre-commitment with Bertrand competition can yield Cournot outcomes also under emissions trading. In the short run, Bertrand output competition reproduces the effects derived under Cournot competition, but displays higher pass-through profits. In a second-best setting of overallocation, a tighter emissions target tends to improve permit-market efficiency in the short run.

Suggested Citation

  • Calford, Evan M. & Heinzel, Christoph & Betz, Regina, 2010. "Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly," Research Reports 95066, Australian National University, Environmental Economics Research Hub.
  • Handle: RePEc:ags:eerhrr:95066
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    Keywords

    Emissions trading; Initial permit allocation; Bertrand competition; EU ETS; Endogenous technology choice; Kreps and Scheinkman; Resource /Energy Economics and Policy; L13; Q28; D43;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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