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Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly

Author

Listed:
  • Evan Calford

    () (Centre for Energy and Environmental Markets, School of Economics, University of New South Wales, Australia)

  • Christoph Heinzel

    () (Centre for Energy and Environmental Markets (CEEM) School of Economics, Australian School of Business, University of New South Wales, Australia)

  • Regina Betz

    () (Centre for Energy and Environmental Markets, School of Economics, University of New South Wales, Australia)

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

  • Evan Calford & Christoph Heinzel & Regina Betz, 2010. "Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly," Environmental Economics Research Hub Research Reports 1059, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:eenhrr:1059
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. EERH Research Reports: June 2010
      by David Stern in Stochastic Trend on 2010-07-03 15:06:00

    More about this item

    Keywords

    Emissions trading; Initial permit allocation; Bertrand competition; EU ETS; Endogenous technology choice; Kreps and Scheinkman;

    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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