Market power in output and emissions trading

DOI10.3390/G11040043MaRDI QIDQ2223644zbMATH OpenOpenAlexFDO

Authors Francisco J. André, Luis Miguel de Castro

Publication date 1 February 2021

Published in Games (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.3390/g11040043

zbMATH Keywords

Cournot modelduopolyemissions tradingmarket powerStackelberg model

Mathematics Subject Classification ID

Hierarchical games (including Stackelberg games) (91A65) Environmental economics (natural resource models, harvesting, pollution, etc.) (91B76)

Review text

Summary: This article focuses on the strategic behavior of firms in the output and the emissions markets in the presence of market power. We consider the existence of a dominant firm in the permit market and different structures in the output market, including Cournot and two versions of the Stackelberg model, depending on whether the permit dominant firm is a leader or a follower in the output market. In all three models, the firm that dominates the permit market is more sensitive to its initial allocation than its competitor in terms of abatement and less sensitive in terms of output. In all three models, output is decreasing and the permit price is increasing in the permit dominant firm's initial allocation. In the Cournot model, permit dominance is fruitless in terms of output and profit if the initial allocation is symmetric. Output leadership is more relevant than permit dominance since an output leader always tends to, ceteris paribus, produce more and make more profit whether it also dominates the permit market or not. This leadership can only be overcompensated for by distributing a larger share of permits to the output follower, and only if the total number of permits is large enough. In terms of welfare, Stackelberg is always superior to Cournot. If the initial permit allocation is symmetric, welfare is higher when the same firm dominates the output and the permit market at the same time.

Recommendations

• Optimal allocation of tradable emission permits under upstream-downstream strategic interaction
• Further results on permit markets with market power and cheating.
• Market design for emission trading schemes
• Marketable permits, market power, and cheating
• Pollution control in a Cournot duopoly via taxes or permits

Cites work

• Assigning pollution permits: are uniform auctions efficient?
• Strategic interaction among firms in output and emission markets: a unified framework

Cited in

(4)

• Competitive dominance of emission trading over Pigouvian taxation in a globalized economy
• Oligopoly meets oligopsony: the case of permits
• Optimal allocation of tradable emission permits under upstream-downstream strategic interaction
• Strategic interaction among firms in output and emission markets: a unified framework

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