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Scarcity Rents and Incentives for Price Manipulation in Emissions Permit Markets with Stackelberg Competition

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  • André, Francisco J.
  • de Castro, Luis Miguel

Abstract

Prior research has shown, on the one hand, that firms subject to a cap-and-trade system can enjoy scarcity rents and, on the other hand, that cost effectiveness in a competitive emission permit market could be affected by tacit collusion and price manipulation when the corresponding polluting product market is oligopolistic. It has also been argued that this type of collusive behavior might be responsible for the high prices of permits observed during the first phase of the EU ETS. We analyze these cross market links using a Stackelberg model to show that, under reasonable assumptions, there are no incentives to collude in order to manipulate prices up. However, incentives for manipulating the price of permits upward appear if there is an initial free allocation of permits, which is a policy argument against grandfathering and in favor of auctioning. This effect is increasing with the amount of permits allocated to the leader. The likelihood of observing price manipulation increases with those changes that tend to undermine the leader’s advantage in output production or to reduce the leader’s abatement cost.

Suggested Citation

  • André, Francisco J. & de Castro, Luis Miguel, 2015. "Scarcity Rents and Incentives for Price Manipulation in Emissions Permit Markets with Stackelberg Competition," MPRA Paper 61770, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:61770
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    References listed on IDEAS

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    1. repec:eee:enepol:v:107:y:2017:i:c:p:119-130 is not listed on IDEAS

    More about this item

    Keywords

    Emissions permits; Collusion; Market power; Duopoly; Stackelberg model.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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