Mitigating market power under tradeable permits


Heindl, Peter


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URL: https://ub-madoc.bib.uni-mannheim.de/32589
URN: urn:nbn:de:bsz:180-madoc-325894
Document Type: Working paper
Year of publication: 2012
The title of a journal, publication series: ZEW Discussion Papers
Volume: 12-065
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > Zentrum für Europ. Wirtschaftsforschung (ZEW)
MADOC publication series: Veröffentlichungen des ZEW (Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: Q53 , L12 , D21,
Subject headings (SWD): Emissionshandel , Finanzintermediär , Marktmacht , Umweltpolitik , Anreizregulierung , Wohlfahrt , Analyse , Theorie
Keywords (English): Tradeable permits , market power , environmental regulation
Abstract: As shown by R. Hahn [6], free allocation equal to the amount of permits a firm with market power uses in equilibrium, can prevent welfare losses. If the necessary amount of free allocation is not provided to the firm with market power, a second best solution is obtained where marginal batement costs of regulated firms are not equated. In this paper, it is proposed that the government may change the economy wide emissions constraint (cap) as a response to market power, e.g. when free allocation cannot be adjusted. Changing the cap can lead to a situation where marginal abatement costs are equated in the presence of market power. Because changing the cap will lead to changes of social welfare, both effects must be balanced. It is shown that there exists a second best social optimum by balancing the positive effect of limiting market power and the negative effect of changing the cap.

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