CAAA Induced Competition in Coal Markets: A Model of Coal and Allowances
The Clean Air Act Amendments (CAAA) of 1990 will have a major impact on U.S. coal markets. We argue that coal suppliers will be able to use the market in sulfur dioxide emissions allowances created by the CAAA to increase the range of their competitive strategies in their core business, coal. Entering the allowance market as a broker enables the coal supplier to bundle emissions allowances with coal. We develop a spatial model of CAAA compliance costs which highlights the impact of allowances on coal markets. This model is used to suggest how a coal supplier may use bundling strategically to improve its market share in coal. Key features of the model include spatial differentiation of electric utilities and coal suppliers, bargaining between electric utilities and coal suppliers, capital costs for CAAA compliance, and transaction costs in the allowance markets. We explore some of the implications and limitations of entry into the allowance market by coal suppliers and discuss questions for future research.
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