Tradeable Emission Permits Regulations in the Presence of Imperfectly Competitive Product Markets: Welfare Implications

In the present paper, we analyse the interaction of a competitive market for emission permits with an oligopolistic product market. It is well known that a competitive permits market achieves the cost minimizing distribution of abatement effort among the polluting firms for a given reduction in emissions. However, when the product market is oligopolistic, it may redistribute production inefficiently among firms. It has been suggested that this inefficiency can outweigh the gains obtained from using emission permits instead of command and control. Although this argument is clearly correct under full information, it is shown in the present paper that it reverses under incomplete information. In particular, it is shown that when tradeable emission permits are specified according to the standard textbook example, they yield higher social welfare than the command and control regulation.     

Competitive Permit Markets and Vertical Structures: The Relevance of Imperfectly Competitive Eco‐Industries

Permit markets lead polluting firms to purchase abatement goods from an eco‐industry which is often concentrated. This paper studies the consequences of this sort of imperfectly competitive eco‐industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second‐best pollution cap. By comparing this situation to one of perfect competition, we show that Cournot competition on the abatement good market contributes not only to a nonoptimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power, measured by the margin taken by the noncompetitive firms, and suggest a second‐best larger pollution cap.     

Market Power in Laboratory Emission Permit Markets

Many proposals suggesting the use of markets tocontrol pollution assume markets will becompetitive. When markets do not exhibitcompetitive characteristics, however, shouldthey still be expected to result in efficiencyimprovement relative to traditional approaches? This paper employs experimental economicmethods to examine the effect of marketstructure on the use of marketable emissionspermits. Results indicate that in a market withone dominant firm and a number of fringe firms,strategic manipulation occurs repeatedly in thelaboratory as predicted by market power models,undermining the allocative and dynamicefficiency benefits such markets offer. Whenfirms compete in a downstream product marketdominated by the same single firm, marketefficiency can actually be reduced with theimplementation of permit markets. Final marketefficiencies reflect initial endowments and areinfluenced by competitive conditions elsewherein the economy, indicating that policy-makersshould carefully consider whether markets areappropriate in such circumstances.     

Market Power,Permit Allocation and Efficiency in Emission Permit Markets

Market power in permit markets has been examined in some detail following the seminal work of Hahn (Q J Econ 99(4):753–765, 1984), but the effect of free allocation on price manipulation with market power in both product and permit market has not been fully addressed. I show that in this case, the threshold of free allocation above which a dominant firm will set the permit price above its marginal abatement costs is below its optimal emissions in a competitive market, and that overall efficiency cannot be achieved by means of permit allocation alone. In addition to being of general economic interest, this issue is relevant in the context of the EU ETS. I find that the largest German, UK and Nordpool power generators received free allowances in excess of the derived threshold. Conditional on having price-setting power in both the electricity and permit markets, these firms would have found it profitable to manipulate the permit price upwards despite being net permit buyers.     

Carbon Trading with Imperfectly Observable Emissions

The Kyoto Protocol foresees emission trading but does not yet specify verification of (uncertain) emissions. This paper analyses a setting in which parties can meet their emission targets by reducing emissions, by investing in monitoring (reducing uncertainty of emissions) or by (bilaterally) trading permits. We derive the optimality conditions and carry out various numerical simulations. Our applications suggest that including uncertainty could increase compliance costs for the USA, Japan and the European Union. Central Europe and the Former Soviet Union might be able to gain from trading due to higher permit prices. Emissions trading could also lower aggregate uncertainty on emissions.     

A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities

This paper provides an answer to the question: Are emission taxes an efficient and self-enforcing mechanism to control correlated externality problems? By “correlated externalities” we mean multiple pollutants that are jointly produced by a single source but cause differentiated regional and global externalities. By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. This mechanism incorporates sequential decision making among the jurisdictions and therefore determines an equilibrium based on the concept of subgame perfection. We find that, unlike joint domestic and international tradable permit markets, joint emission taxes and a hybrid scheme of permits and taxes are neither efficient nor self-enforcing.     

产品差异、转移成本和市场竞争

文章通过在豪泰林空间差异模型的基础上结合转移成本构建的博弈模型,主要研究转移成本和产品差异的存在对于企业价格竞争和策略性行为的影响。文章发现纯策略价格均衡是否存在以及在位企业容纳还是遏制竞争对手的潜在进入,都依赖于转移成本相对于产品差异程度的大小。     

On the Efficiency of Competitive Markets for Emission Permits

It is typical for economists andpolicy makers alike to presume that competitivemarkets allocate emission permits efficiently.This paper demonstrates that competition in theemission permits market cannot assureefficiency when the product market isoligopolistic. We provide the conditions underwhich a bureaucratic mechanism is welfaresuperior to a tradeable emission permitssystem. Price-taking behaviour in the permitsmarket ensures transfer of licenses to the lessefficient in abatement firms, which then becomemore aggressive in the product market,acquiring additional permits. As a result, theless efficient firms end up with a higher thanthe welfare maximizing share of emissionpermits. If the less efficient in abatementfirms are also less efficient in production,competitive trading of permits may result inlower output and welfare.     

Decentralization in Pollution Permit Markets

A pollution permit market is decentralized when firms are allowed to trade permits across time, regions or pollutants. Using a model in which firms have better information about their abatement costs than a regulator, we develop a comparative advantage formula that delineates whether or not pollution permit markets should be decentralized. When the damage from pollution is described by a separable function, the formula implies a simple sufficient condition for not allowing decentralization.     

Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking

We examine the incentives that firms have to invest in cleaner abatementtechnology when the banking of permits is allowed in emission permittrading schemes. We show that under certainty permit banking can distortincentives for investment and lead to a sub-optimal amount of investmentspending. Under imperfect information, aggregate abatement costuncertainty and investment irreversibility provide arguments for allowingbanking. We generalize the model to consider these, showing that somebanking is desirable but that it need not be the case that the privatebanking solution is optimal.     

Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS

A well-known result about market power in emission permit markets is that efficiency can be achieved by full free allocation to the dominant firm. I show that this result breaks down when taking the interaction between input and output markets into account, even if the dominant firm perceives market power in the permit market alone. I then examine the empirical evidence for price manipulation by the ten largest electricity firms during phase I of the EU ETS. I find that some firms’ excess allowance holdings are consistent with strategic price manipulation, and that they cannot be explained by price speculation or by precautionary purchases to insure against uncertain future emissions. My results suggest that market power is likely to be an empirically relevant concern during the early years of emission permit markets.     

Managing Permit Markets to Stabilize Prices

The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in cases where the marginal damages of emissions are relatively flat, such as with greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.     

Breaking Collusion in Auctions through Speculation: An Experiment on CO2 Emission Permit Markets

The European Emission Trading Scheme (EU‐ETS) has chosen to adopt an auctioning procedure to initially allocate CO₂ emission permits. Free allocation of permits will become an exception for the third phase (2013–2020) and most firms will have to buy all their permits on the market or via auctions. The ability of bidders to collude is a key concern about the design of the auction format. To counter collusion, the auction can be open to bidders without compliance obligations (speculators). This paper aims at studying experimentally speculation as a collusion‐breaking device in two different auction mechanisms: the uniform‐price sealed‐bid auction and the ascending clock auction. Our results suggest that a uniform sealed‐bid auction open to speculators should be chosen from a revenue maximization point of view. In this mechanism, compliance agents adopt an aggressive strategy toward speculators. This strategy significantly increases the seller's revenue, compared to the more collusive clock auction. In the latter, on the contrary, bidders accommodate speculators, letting them buy permits in the auction and buying their necessary permits on the secondary market. However, as opening the auction to speculators deteriorates efficiency, the regulator faces a trade‐off between these two objectives.     

The Emergence of Market Power in Emission Rights Markets: The Role of Initial Permit Distribution

This paper offers an analytical model of emission permit markets in which a large number of regulated emitters participate, and derives formulae that estimate the degree of market distortion. These formulae clearly show the entire dependence of the ratio of market prices to competitive levels on the permit initial distribution as well as the existence of a threshold for effective market power. While the findings challenge a well-known conception of the Coase Theorem, they have significant policy implications vis-à-vis the Kyoto Protocol and the related policy debates on excess emission rights known as hot air.     

Tariffs and Welfare in an Imperfectly Competitive Overlapping-Generations Model

The effect of a tariff is analyzed in a two-sector model in an uncertain-lifetimes framework. One of the sectors is monopolistically competitive. It is shown that while a tariff leads to a consumption boom and possibly a current-account surplus, its welfare effects depend on whether the homogeneous good or the differentiated good is exported by the small open economy. Welfare improves if the differentiated good is nontraded but deteriorates if the homogeneous good is nontraded.     

Stabilisation, Policy Targets and Unemployment in Imperfectly Competitive Economies

This paper argues that the rate of equilibrium unemployment depends on the objectives of the Central Bank. In a model where the Central Bank uses monetary policy to stabilise the economy, we show that unemployment and inflation will be lower with an inflation target than with targets for output, money or nominal GDP. The intuition for this is that the elasticities of demand in both the product and the labour markets are greater when there is an inflation target; we show that this leads to a lower mark-up of price over marginal cost and makes wages more sensitive to unemployment.     

Dynamic and Comparative Static Analysis of Imperfectly Competitive International Fishery

A dynamic system for change of fish stock is formulated assuming that two asymmetric rival countries harvest fish from a common fishing ground and sell it in an imperfectly competitive market. The existence of a unique stable steady state is examined based on the dynamic system. Comparative static analysis is conducted in relation to changes in national fishing management policies to explore, among other things, rent-shifting from one country to another.     

Emission Discharge Permit Trading and Persistant Air Pollutants (A Common Pool Market Application with Health Risk Specifications)

International Advances in Economic Research - This paper shows the development of a common pool permit market formulated as a dynamic gross pool market for trading emission discharge permits. The...     

Cross-Industry Emission Permits Trading

The present paper examines the effectiveness of emission permits trading across industries. We find that, while permits trading in a competitive environment minimizes costs of compliance, it also enhances product market imperfections. We also find that a standard-setting regulation yields superior welfare results if policy makers have able information. Standard setting allows policy makers the flexibility of taking into account the existing imperfections in each industry. Although not surprising, this result has important policy implications in situations in which policy makers consider establishing permits trading between publicly owned dominant polluters and other industrial polluters. Since policy makers have able information on publicly-owned firms, it might be welfare improving to directly control emissions of the dominant publicly-owned polluters. Given that many of the major polluters in the real world are large firms in heavily concentrated industries many of which are also regulated, our result warrants policy makers' attention.     

Regulating Insider Trading In Betting Markets

Although trading in securities in conventional financial markets on the basis of inside information is restricted by law, the rules against such trading in betting markets are rather more ambiguous. It is argued in this paper that, since insider trading in betting markets imposes a cost on the great majority of bettors, tighter strictures against such trading would benefit all but the insiders. This case is supported by the use of empirical evidence which shows that betting markets which are characterized by tighter controls against insider activity are also characterized by a significantly lower incidence of such activity.