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Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power

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  • Julien Chevallier

    () (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

Stemming from politically given market imperfections in a tradable permits system, this paper develops a Stackelberg game with two types of non-cooperative agents to describe how a large -potentially dominant- agent may exercise market power at the expense of a competitive fringe. In a dynamic framework with full forward and backward temporal flexibility (i.e. 1:1 Intertemporal Trading Ratio), this intra-industry model then suggests an optimal allocation criterion for grandfathered permits based on recent emissions. This paper contributes to the permit trading literature by shedding some light on the decision to allow banking and borrowing, a debate which is typically overlooked by the debate to introduce the permits market itself among other environmental regulation tools. Provisional results are presented under perfect information.

Suggested Citation

  • Julien Chevallier, 2009. "Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power," Working Papers halshs-00124713, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00124713
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00124713
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    References listed on IDEAS

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    1. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
    2. Gernot Klepper & Sonja Peterson, 2005. "Trading Hot-Air. The Influence of Permit Allocation Rules, Market Power and the US Withdrawal from the Kyoto Protocol," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(2), pages 205-228, October.
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    6. 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.
    7. Matti Liski & Juan-Pablo Montero, 2005. "Market power in a storable-good market - Theory and applications to carbon and sulfur trading," Working Papers 0516, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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    10. Eftichios Sartzetakis, 2004. "On the Efficiency of Competitive Markets for Emission Permits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 27(1), pages 1-19, January.
    11. Jouvet, Pierre-Andre & Michel, Philippe & Rotillon, Gilles, 2005. "Optimal growth with pollution: how to use pollution permits?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1597-1609, September.
    12. A. Denny Ellerman & Ian Sue Wing, 2003. "Absolute versus intensity-based emission caps," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages 7-20, December.
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    14. Christoph BOhringer & Andreas LOschel, 2003. "Market power and hot air in international emissions trading: the impacts of US withdrawal from the Kyoto Protocol," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 651-663.
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    Keywords

    emissions trading; banking; borrowing; market power; differential game; marché de permis d'émissions négociables; stock de permis; emprunt de permis; pouvoir de marché; jeu différentiel;

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