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Optimal allocation of tradable emission permits under upstream-downstream strategic interaction

  • Joana Resende

    (CORE - Center for Operations Research and Econometrics - Université Catholique de Louvain, CETE - University of Porto)

  • Maria Eugénia Sanin

    (CORE - Center for Operations Research and Econometrics - Université Catholique de Louvain, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

In this paper we account for the fact that Cournot equilibrium strategies in the sector under environmental regulation depend on firms'interaction in the permits market (and vice versa). In this context, we show that the cost-effective allocation of permits between firms must compensate the cost-rising strategies exercised by the stronger firm (in the output market). Then, taking into account the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability that serves as an indicator for the de- gree of price competition. The simulation allows us to determine how output market characteristics affect differently optimal permit allocation depending on the regulator's objective.

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Paper provided by HAL in its series Working Papers with number hal-00437645.

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Date of creation: 01 Dec 2009
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Handle: RePEc:hal:wpaper:hal-00437645
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  1. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
  2. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  3. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  4. Yihsu Chen & Benjamin Hobbs & Sven Leyffer & Todd Munson, 2006. "Leader-Follower Equilibria for Electric Power and NO x Allowances Markets," Computational Management Science, Springer, vol. 3(4), pages 307-330, September.
  5. Morch von der Fehr, N-H., 1991. "Tradable Emission Rights and Strategic Interaction," Memorandum 11/1991, Oslo University, Department of Economics.
  6. Pedro Linares & Francisco Javier Santos & Mariano Ventosa & Luis Lapiedra, 2006. "Impacts of the European Emissions Trading Scheme Directive and Permit Assignment Methods on the Spanish Electricity Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 79-98.
  7. 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.
  8. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  9. Hahn, Robert W, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 753-65, November.
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