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Pollution Permits and the Evolution of Market Structure

  • Stephen P. Ryan


  • Mar Reguant


  • Meredith Fowlie


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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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1440.

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Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:1440
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Stephen Ryan, 2005. "The Costs of Environmental Regulation in a Concentrated Industry," Working Papers 0510, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Daniel L. Millimet & Santanu Roy & Aditi Sengupta, 2009. "Environmental Regulations and Economic Activity: Influence on Market Structure," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 99-118, 09.
  3. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
  4. Jean-Pierre Ponssard & Neil Walker, 2008. "EU Emissions Trading and the cement sector: a spatial competition analysis," Post-Print hal-00332053, HAL.
  5. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
  6. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  7. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  8. Hugo Benitez-Silva & John Rust & Gunter Hitsch & Giorgio Pauletto & George Hall, 2000. "A Comparison Of Discrete And Parametric Methods For Continuous-State Dynamic Programming Problems," Computing in Economics and Finance 2000 24, Society for Computational Economics.
  9. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2007. "Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets," NBER Working Papers 13507, National Bureau of Economic Research, Inc.
  10. Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
  11. Neuhoff, K. & Grubb, M. & Keats, K., 2005. "Impact of the allowance allocation on prices and efficiency," Cambridge Working Papers in Economics 0552, Faculty of Economics, University of Cambridge.
  12. Jans, Ivette & Rosenbaum, David I., 1997. "Multimarket contact and pricing: Evidence from the U.S. cement industry," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 391-412, May.
  13. Christian Habermann & Fabian Kindermann, 2007. "Multidimensional Spline Interpolation: Theory and Applications," Computational Economics, Society for Computational Economics, vol. 30(2), pages 153-169, September.
  14. James B. Bushnell & Yihsu Chen, 2009. "Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2," NBER Working Papers 15495, National Bureau of Economic Research, Inc.
  15. Andrew Sweeting, 2004. "Market Power in the England and Wales Wholesale Electricity," Working Papers 0413, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  16. Jean Pierre Ponssard & Neil Walker, 2008. "EU emissions trading and the cement sector: a spatial competition analysis," Climate Policy, Taylor & Francis Journals, vol. 8(5), pages 467-493, September.
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