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Market Power and Instrument Choice in Climate Policy

Author

Listed:
  • Mbéa Bell
  • Sylvain Dessy

Abstract

This paper compares a clean energy standard (CES) and a carbon tax (CT), using theory and quantitative experiments. A two-stage duopolistic competition in the electricity sector between a polluting plant and its non-polluting rival anchors the model underlying these experiments. The CT induces both plants to contribute to clean electricity, whereas the CES only incentivizes the non-polluting plant. Ultimately, what matters for the ranking of these instruments is the size of the pre-existing competitive gap between the two rival plants. When this gap is sufficiently small, the CES becomes the more cost-effective instrument, irrespective of the pre-specified emissions reduction target.

Suggested Citation

  • Mbéa Bell & Sylvain Dessy, 2017. "Market Power and Instrument Choice in Climate Policy," Cahiers de recherche 1704, Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques.
    • Handle: RePEc:lvl:crrecr:1704
    as

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    File URL: http://www.crrep.ca/sites/crrep.ca/files/fichier_publications/crrep-2017-04.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Electricity; Cost-effectiveness; Duopoly; Innovation; Quantitative analysis.;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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