Scarcity Rents and Incentives for Price Manipulation in Emissions Permit Markets with Stackelberg Competition

Francisco André and Luis Miguel de Castro

MPRA Paper from University Library of Munich, Germany

Abstract: Prior research has shown, on the one hand, that firms subject to a cap-and-trade system can enjoy scarcity rents and, on the other hand, that cost effectiveness in a competitive emission permit market could be affected by tacit collusion and price manipulation when the corresponding polluting product market is oligopolistic. It has also been argued that this type of collusive behavior might be responsible for the high prices of permits observed during the first phase of the EU ETS. We analyze these cross market links using a Stackelberg model to show that, under reasonable assumptions, there are no incentives to collude in order to manipulate prices up. However, incentives for manipulating the price of permits upward appear if there is an initial free allocation of permits, which is a policy argument against grandfathering and in favor of auctioning. This effect is increasing with the amount of permits allocated to the leader. The likelihood of observing price manipulation increases with those changes that tend to undermine the leader’s advantage in output production or to reduce the leader’s abatement cost.

Keywords: Emissions permits; Collusion; Market power; Duopoly; Stackelberg model. (search for similar items in EconPapers)
JEL-codes: D43 L13 Q58 (search for similar items in EconPapers)
Date: 2015-02-01
New Economics Papers: this item is included in nep-com, nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:61770

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