Using the allocation of emission permits for strategic trade purposes |
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Authors: | Christos Constantatos Eleftherios Filippiadis Eftichios S Sartzetakis |
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Institution: | 1. Department of Economics, University of Macedonia, 156 Egnatia Str, Thessaloniki, Greece 2. CREATE, Université Laval, Quebec, Canada 3. School of Business, University of Buckingham, Montréal, Canada
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Abstract: | We show that the presence of transaction costs in emission permit markets challenges the common presumption that grandfathering permits corresponds to lump-sum transfers with no strategic effects on output. Fixed transaction-costs influence firms’ decision to participate in the permits market, while variable transaction-costs affect firms’ output choice by creating a wedge between buyers’ and sellers’ opportunity cost of using permits. Thus, permit grandfathering can be used as a strategic trade instrument even when firms are price takers in the permit markets. Grandfathered permits differ from subsidies in that the stimulus they provide is bounded exogenously and rather limited. |
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