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Pollution Permits and the Evolution of Market Structure

  • Stephen P. Ryan

    (MIT)

  • Mar Reguant

    (MIT)

  • Meredith Fowlie

    (UC-Berkeley)

We explore the long run dynamic implications of subjecting an imperfectly competitive industry to market-based pollution regulation. We are particularly interested in understanding how the allocation of emissions permits in a cap-and-trade program can influence the evolution of a trade exposed oligopolistic industry. Using two decades of panel data on the US Portland cement industry, we estimate a fully dynamic model of firms’ strategic entry, exit, production, and investment decisions. We then use the model to simulate counterfactual outcomes under three general classes of allocation regimes: auctioning, grandfathering, and contingent updating. We find that the dynamic evolution of market structure can vary significantly across the policy scenarios we consider. We quantify the overall costs of achieving desired emissions reductions and the distribution of those costs.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_1440.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1440.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1440
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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