Market Power and Windfall Profits in Emission Permit Markets
Although market power in permit markets has been examined in some detail following the seminal work of Hahn (1984), the effect of free allocation on price manipulation with market power in both output and permit market has not specifically been addressed. I show that in this case, the threshold for free allocation above which dominant firms will increase the permit price is below their emissions. In addition to being of general economic interest, this issue is relevant in the context of the EUETS. I find that European power generators received free allowances in excess of the derived threshold.
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