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Market Power, Permit Allocation and Efficiency in Emission Permit Markets

Hintermann, Beat

In: Environmental and Resource Economics, 2011, vol. 49, no. 3, p. 327-349

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    Titre
    • Market Power, Permit Allocation and Efficiency in Emission Permit Markets
    Auteur
    • Hintermann, Beat. Faculty of Business and Economics, University of Basel, Peter Merian-Weg 6, 4002, Basel, Switzerland
    Type de document
    • Postprint
    Langue
    • Anglais
    Publié dans
    • Environmental and Resource Economics, 2011, vol. 49, no. 3, p. 327-349. Springer Netherlands
    Autre version électronique
    Identifiant OAI-PMH
    • oai:doc.rero.ch:310646
    Summary
    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