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Carbon Sequestration and Permit Trading on the Competitive Fringe



This paper makes two contributions to the carbon-sequestration literature. The first is the development of a theoretical framework in which sequestration and permit trading are analyzed jointly in the context of a competitive fringe model. The second is a numerical analysis demonstrating the role market structure, or market power, might play in the determination of an equilibrium sequestration allocation and carbon price. We present three comparative-static cases, the first two of which assess the impact of relative changes in the cost structures of the dominant firm and competitive fringe. For these two cases we find that the equilibrium allocation of sequestration aligns with a higher carbon price when the competitive fringe experiences an increase in its marginal cost parameter. Conversely, the carbon price falls when the dominant firm experiences a decrease in its marginal cost parameter. In a third case we evaluate the impact of stricter regulation on the abatement decisions of the polluting firm. Our results demonstrate the importance of incorporating into empirical supply-side models demand-side information that is reflective of an underlying market structure.

Suggested Citation

  • Arthur J. Caplan, 2009. "Carbon Sequestration and Permit Trading on the Competitive Fringe," Working Papers 2009-10, Utah State University, Department of Economics.
  • Handle: RePEc:usu:wpaper:2009-10

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    References listed on IDEAS

    1. Susan Subak, 2002. "Forest certification eligibility as a screen for CDM sinks projects," Climate Policy, Taylor & Francis Journals, vol. 2(4), pages 335-351, December.
    2. Lubowski, Ruben N. & Plantinga, Andrew J. & Stavins, Robert N., 2006. "Land-use change and carbon sinks: Econometric estimation of the carbon sequestration supply function," Journal of Environmental Economics and Management, Elsevier, vol. 51(2), pages 135-152, March.
    3. De Jong, Ben H. J. & Tipper, Richard & Montoya-Gomez, Guillermo, 2000. "An economic analysis of the potential for carbon sequestration by forests: evidence from southern Mexico," Ecological Economics, Elsevier, vol. 33(2), pages 313-327, May.
    4. Sedjo, Roger, 1999. "Potential for Carbon Forest Plantation in Marginal Timber Forests: The Case of Patagonia, Argentina," Discussion Papers dp-99-27, Resources For the Future.
    5. Kolstad, Charles, 2011. "Intermediate Environmental Economics: International Edition," OUP Catalogue, Oxford University Press, edition 2, number 9780199732654.
    6. Asheim, Geir B. & Froyn, Camilla Bretteville & Hovi, Jon & Menz, Fredric C., 2006. "Regional versus global cooperation for climate control," Journal of Environmental Economics and Management, Elsevier, vol. 51(1), pages 93-109, January.
    7. Benitez, Pablo C. & McCallum, Ian & Obersteiner, Michael & Yamagata, Yoshiki, 2007. "Global potential for carbon sequestration: Geographical distribution, country risk and policy implications," Ecological Economics, Elsevier, vol. 60(3), pages 572-583, January.
    8. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, vol. 29(3), pages 283-302, May.
    9. Robert N. Stavins, 1999. "The Costs of Carbon Sequestration: A Revealed-Preference Approach," American Economic Review, American Economic Association, vol. 89(4), pages 994-1009, September.
    10. R. Andrew Muller & Stuart Mestelman & John Spraggon & Rob Godby, 1999. "Can auctions control market power in emissions trading markets," Department of Economics Working Papers 1999-12, McMaster University.
    11. 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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    More about this item


    carbon sequestration; competitive fringe; abatement credits;

    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
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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