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«Hot Air» and Market Power in International Emission Trading




In respect to GHG emission reduction targets set in the Kyoto Protocol in 1997, an emission quotas trading system will be implemented among the Annex-1 participating countries to lower the mitigation costs of the international cooperation on climate change issue. Nonetheless, in the way the market was designed, the States of the Former Soviet Union and Eastern Europe are likely to become large sellers of carbon as a result of the drop in emissions level due to economic downturn, referring to «Hot Air». Indeed, these countries may exert substantially a dominant position in the international permits market since the US had decided to withdraw from the Kyoto Protocol. This paper aims to develop a better understanding of the consequence of «Hot Air» in the international carbon emission trading, using some policy variants simulated with the computable general equilibrium GEM-E3 World model. The present analyse focuses particularly on the measures of «Hot Air» and the implications of potential market power in the emission trading market. Under various scenario options, the exercise of market power lead to a misallocation of abatement effort across the remaining Annex-1 countries as a consequence of permits price and welfare effects.

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  • Florent Pratlong & Denise Van Regemorter & Paul Zagamé, 2004. "«Hot Air» and Market Power in International Emission Trading," Cahiers de la Maison des Sciences Economiques v04074, Université Panthéon-Sorbonne (Paris 1).
  • Handle: RePEc:mse:wpsorb:v04074

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    References listed on IDEAS

    1. Eyckmans Johan & van Steenberghe Vincent & Van Regemorter Denise, "undated". "Is Kyoto Fatally Flawed? An Analysis with MacGEM," EcoMod2002 330800025, EcoMod.
    2. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
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    Emission trading; market power; MECG.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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