IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_4447.html
   My bibliography  Save this paper

Market Power in Emission Permit Markets: Theory and Evidence

Author

Listed:
  • Beat Hintermann

Abstract

A well-known result about market power in emission permit markets is that efficiency can be achieved by full free allocation to the dominant firm. I show that this result breaks down when taking the interaction between input and output markets into account, even if the firm perceives market power in the permit market alone. In fact, the dominant firm may have an incentive to inflate the permit price even if it receives no free permits at all. I examine the empirical evidence for price manipulation by large electricity firms during Phase I of the EU ETS. I find that the pattern and extent of firms’ allowance holdings are consistent with strategic price manipulation, and they appear unlikely to be the result of precautionary purchases due to carbon risk.

Suggested Citation

  • Beat Hintermann, 2013. "Market Power in Emission Permit Markets: Theory and Evidence," CESifo Working Paper Series 4447, CESifo.
  • Handle: RePEc:ces:ceswps:_4447
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp4447.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. R. Andrew Muller & Stuart Mestelman, 1998. "What have we learned from emissions trading experiments?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 225-238.
    2. Matti Liski & Juan-Pablo Montero, 2005. "A Note on Market Power in an Emission Permits Market with Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(2), pages 159-173, June.
    3. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Zhao, Jinhua, 2003. "Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges," Journal of Public Economics, Elsevier, vol. 87(12), pages 2765-2789, December.
    6. Robert Godby, 2002. "Market Power in Laboratory Emission Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 23(3), pages 279-318, November.
    7. Frank Convery, 2009. "Origins and Development of the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(3), pages 391-412, July.
    8. Krattenmaker, Thomas G & Salop, Steven C, 1986. "Competition and Cooperation in the Market for Exclusionary Rights," American Economic Review, American Economic Association, vol. 76(2), pages 109-113, May.
    9. Jamie Brown-Kruse & Steven R Elliot & Rob Godby, 1995. "Strategic Manipulation of Pollution Permit Markets: An Experimental Approach," Department of Economics Working Papers 1995-03, McMaster University.
    10. Harstad, Bård & Eskeland, Gunnar S., 2010. "Trading for the future: Signaling in permit markets," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 749-760, October.
    11. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
    12. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
    13. Jūratė Jaraitė & Frank Convery & Corrado Di Maria, 2010. "Transaction costs for firms in the EU ETS: lessons from Ireland," Climate Policy, Taylor & Francis Journals, vol. 10(2), pages 190-215, March.
    14. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
    15. Marc Chesney & Luca Taschini, 2012. "The Endogenous Price Dynamics of Emission Allowances and an Application to CO 2 Option Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(5), pages 447-475, November.
    16. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
    17. Cetin, Umut & Verschuere, Michel, 2009. "Pricing and hedging in carbon emissions markets," LSE Research Online Documents on Economics 29321, London School of Economics and Political Science, LSE Library.
    18. Bohringer, Christoph & Lange, Andreas, 2005. "On the design of optimal grandfathering schemes for emission allowances," European Economic Review, Elsevier, vol. 49(8), pages 2041-2055, November.
    19. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
    20. Oberndorfer, Ulrich, 2009. "EU Emission Allowances and the stock market: Evidence from the electricity industry," Ecological Economics, Elsevier, vol. 68(4), pages 1116-1126, February.
    21. Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
    22. Sinn, Hans-Werner, 1981. "Eigentumsrechte, Kompensationsregeln und Marktmacht," Munich Reprints in Economics 19911, University of Munich, Department of Economics.
    23. Dafna Eshel, 2005. "Optimal Allocation of Tradable Pollution Rights and Market Structures," Journal of Regulatory Economics, Springer, vol. 28(2), pages 205-223, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Johansson, Per-Olov, 2015. "Tradable Permits in Cost-Benefit Analysis," SSE Working Paper Series in Economics 2015:3, Stockholm School of Economics.
    2. Hintermann, Beat & Peterson, Sonja & Rickels, Wilfried, 2014. "Price and market behavior in Phase II of the EU ETS," Kiel Working Papers 1962, Kiel Institute for the World Economy (IfW Kiel).
    3. Jean-Philippe Nicolaï, 2015. "Emission Reduction and Profit-Neutral Permit Allocations," CER-ETH Economics working paper series 15/224, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beat Hintermann, 2017. "Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(1), pages 89-112, January.
    2. Hintermann, Beat & Peterson, Sonja & Rickels, Wilfried, 2014. "Price and market behavior in Phase II of the EU ETS," Kiel Working Papers 1962, Kiel Institute for the World Economy (IfW Kiel).
    3. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.
    4. Remes, Piia, 2013. "Putting a Price on Carbon – Econometric Essays on the European Union Emissions Trading Scheme and its Impacts," Research Reports 62, VATT Institute for Economic Research.
    5. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    6. Aatola, Piia, 2013. "Putting a Price on Carbon – Econometric Essays on the European Union Emissions Trading Scheme and its Impacts," Research Reports P62, VATT Institute for Economic Research.
    7. Beat Hintermann, 2009. "An Options Pricing Approach for CO2 Allowances in the EU ETS," CEPE Working paper series 09-64, CEPE Center for Energy Policy and Economics, ETH Zurich.
    8. Luca Taschini & Marc Chesney & Mei Wang, 2014. "Experimental comparison between markets on dynamic permit trading and investment in irreversible abatement with and without non-regulated companies," Journal of Regulatory Economics, Springer, vol. 46(1), pages 23-50, August.
    9. Hintermann, Beat, 2012. "Pricing emission permits in the absence of abatement," Energy Economics, Elsevier, vol. 34(5), pages 1329-1340.
    10. Aatola, Piia & Ollikainen, Markku & Toppinen, Anne, 2013. "Price determination in the EU ETS market: Theory and econometric analysis with market fundamentals," Energy Economics, Elsevier, vol. 36(C), pages 380-395.
    11. Fang, Sheng & Lu, Xinsheng & Li, Jianfeng & Qu, Ling, 2018. "Multifractal detrended cross-correlation analysis of carbon emission allowance and stock returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 509(C), pages 551-566.
    12. Aleksandar Zaklan, 2023. "Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market," American Economic Journal: Economic Policy, American Economic Association, vol. 15(2), pages 526-558, May.
    13. Julien Chevallier & Benoît Sévi, 2014. "On the Stochastic Properties of Carbon Futures Prices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 127-153, May.
    14. Venmans, Frank, 2012. "A literature-based multi-criteria evaluation of the EU ETS," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(8), pages 5493-5510.
    15. Julien Chevallier & Stéphane Goutte, 2014. "The goodness-of-fit of the fuel-switching price using the mean-reverting Lévy jump process," Working Papers 2014-285, Department of Research, Ipag Business School.
    16. Maogang Tang & Silu Cheng & Wenqing Guo & Weibiao Ma & Fengxia Hu, 2023. "Relationship between carbon emission trading schemes and companies’ total factor productivity: evidence from listed companies in China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(10), pages 11735-11767, October.
    17. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    18. Dechezleprêtre, Antoine & Nachtigall, Daniel & Venmans, Frank, 2023. "The joint impact of the European Union emissions trading system on carbon emissions and economic performance," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    19. Charles, Amélie & Darné, Olivier & Fouilloux, Jessica, 2011. "Testing the martingale difference hypothesis in CO2 emission allowances," Economic Modelling, Elsevier, vol. 28(1), pages 27-35.
    20. Gregor Zoettl, 2021. "Emission trading systems and the optimal technology mix," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(2), pages 281-327, June.

    More about this item

    Keywords

    emission permit market; market power; cost pass-through; price manipulation;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4447. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.