Market Power, Permit Allocation and Efficiency in Emission Permit Markets
Project funded by own resources
Project title Market Power, Permit Allocation and Efficiency in Emission Permit Markets
Principal Investigator(s) Hintermann, Beat
Organisation / Research unit Departement Wirtschaftswissenschaften / Public Economics / Public Finance (Hintermann)
Project start 01.01.2007
Probable end 30.11.2010
Status Completed
Abstract

Market power in permit markets has been examined in some detail following the seminal work of Hahn (1984), but the effect of free allocation on price manipulation with market power in both output and permit market has not been addressed.  I show that in this case, the threshold of free allocation above which a dominant firm will increase the permit price is below its optimal emissions in a competitive market, and that by means of permit allocation alone, overall efficiency cannot be achieved.  In addition to being of general economic interest, this issue is relevant in the context of the EUETS.  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.

Keywords Air pollution, CO2, cost pass-through, electricity generation, emission permit markets, EU ETS, market power, permit allocation
Financed by University funds

Published results ()

  ID Autor(en) Titel ISSN / ISBN Erschienen in Art der Publikation
978056  Hintermann, Beat  Market power, permit allocation and efficiency in emission permit markets  0924-6460  Environmental and resource economics  Publication: JournalArticle (Originalarbeit in einer wissenschaftlichen Zeitschrift) 
   

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