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Emissions Trading with Profit-Neutral Permit Allocations

Author

Listed:
  • Cameron Hepburn

    () (School of Enterprise and the Environment, Oxford University)

  • John K.-H. Quah

    () (Department of Economics, Oxford University)

  • Robert A. Ritz

    () (Department of Economics, Oxford University)

Abstract

This paper examines the operation of an emissions trading scheme (ETS) in a Cournot oligopoly. We study the impact of the ETS on industry output, price, costs, emissions, and profits. In particular, we develop formulae for the number of emissions permits that have to be freely allocated to firms in order to neutralize any adverse impact the ETS may have on profits. These formulae tell us that the profit impact of the ETS is usually limited. Indeed, under quite general conditions, industry profits are preserved so long as firms are freely allocated a fraction of their total demand for permits, with this fraction being lower than the industry's Herfindahl index.

Suggested Citation

  • Cameron Hepburn & John K.-H. Quah & Robert A. Ritz, 2008. "Emissions Trading with Profit-Neutral Permit Allocations," Economics Papers 2008-W12, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:0812
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    Cited by:

    1. Dieter Helm & Cameron Hepburn & Giovanni Ruta, 2012. "Trade, climate change, and the political game theory of border carbon adjustments," Oxford Review of Economic Policy, Oxford University Press, vol. 28(2), pages 368-394, SUMMER.
    2. Samuel Fankhauser & Cameron Hepburn & Jisung Park, 2010. "Combining Multiple Climate Policy Instruments: How Not To Do It," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 209-225.
    3. Clémence Christin & Jean-Philippe Nicolai & Jerome Pouyet, 2013. "Pollution Permits, Imperfect Competition and Abatement Technologies," CER-ETH Economics working paper series 13/186, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    4. Bruno Lanz and Sebastian Rausch, 2016. "Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    5. Schmidt, Robert C. & Heitzig, Jobst, 2014. "Carbon leakage: Grandfathering as an incentive device to avert firm relocation," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 209-223.
    6. Jean-Philippe Nicolaï, 2015. "Emission Reduction and Profit-Neutral Permit Allocations," CER-ETH Economics working paper series 15/224, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    7. Schmidt, Robert & Pollrich, Martin & Stiel, Caroline, 2013. "An optimal incentive contract to avert firm relocation under unilateral environmental regulation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79741, Verein für Socialpolitik / German Economic Association.
    8. Achim Voss & Mark Schopf, 2014. "Lobbying over Exhaustible-Resource Extraction," Working Papers CIE 80, Paderborn University, CIE Center for International Economics.
    9. Robert A. Ritz, 2009. "Carbon leakage under incomplete environmental regulation: An industry-level approach," Economics Series Working Papers 461, University of Oxford, Department of Economics.
    10. repec:kap:enreec:v:69:y:2018:i:4:d:10.1007_s10640-016-0096-1 is not listed on IDEAS
    11. Grey, F., 2017. "Corporate lobbying for environmental protection," Cambridge Working Papers in Economics 1732, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

    Emissions trading; permit allocation; profit-neutrality; cost pass-through; abatement; grandfathering;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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