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Using the allocation of emission permits for Strategic Trade purposes

Christos Constantatos, Lefteris Filippiadis and Eftichios Sartzetakis (esartz@uom.edu.gr)
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Lefteris Filippiadis: Concordia University

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: When the market of tradable emissions permits is perfectly competitive, free allocation of permits through some discretionary rules corresponds to lump sum transfers and cannot have strategic effects. This conclusion is reversed when transactions costs are introduced in the TEP market. Transactions costs proportional to the value of permits exchanged create a gap between selling and the buying price, thus resulting in lower opportunity costs for the holder of excess permits. This can be effectively exploited by a government in order to encourage its firm to gain larger share in an international market. When costs per transaction are fixed, the above effects disappear for those firms participating in the market. For small firms, however, participation may be prohibitively expensive, turning the opportunity cost of any permits hold, equal to zero. This suggests that free permits may create strategic effects within the hands of small firms but not when granted to larger firms.

Keywords: Tradeable Emissions Permits; strategic trade policy. (search for similar items in EconPapers)
JEL-codes: Q20 Q28 (search for similar items in EconPapers)
Date: 2011-06, Revised 2011-06
New Economics Papers: this item is included in nep-ene and nep-env
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Journal Article: Using the allocation of emission permits for strategic trade purposes (2014) Downloads
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