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Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition

Author

Listed:
  • Francisco J. André

    (Universidad Complutense de Madrid, Spain)

  • Luis M. de Castro

    (Universidad Complutense de Madrid, Spain)

Abstract

It has been shown in prior research that cost effectiveness in the competitive emissions permit market could be affected by tacit collusion or price manipulation when the corresponding polluting product market is oligopolistic. We analyze these cross market links using a Stackelberg model to show that under reasonable assumptions, there are no incentives to collude for lobbying prices up. However, incentives for manipulating the price of permits up appear if there is an initial free allocation of permits, which is a policy argument against grandfathering and in favor of auctioning. This effect is increasing with the amount of permits allocated to the leader. Moreover, the changes for price manipulation increase with those changes that tend to undermine the leader's advantage in output production or to reduce the leader’s abatement cost.

Suggested Citation

  • Francisco J. André & Luis M. de Castro, 2015. "Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition," Working Papers 2015.06, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2015.06
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    References listed on IDEAS

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    Cited by:

    1. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.

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    More about this item

    Keywords

    Emissions Permits; Collusion; Market Power; Duopoly; Stackelberg Model;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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