Carbon Sequestration and Permit Trading on the Competitive Fringe

Arthur Caplan

No 2009-10, Working Papers from Utah State University, Department of Economics

Abstract: This paper makes two contributions to the carbon-sequestration literature. The first is the development of a theoretical framework in which sequestration and permit trading are analyzed jointly in the context of a competitive fringe model. The second is a numerical analysis demonstrating the role market structure, or market power, might play in the determination of an equilibrium sequestration allocation and carbon price. We present three comparative-static cases, the first two of which assess the impact of relative changes in the cost structures of the dominant firm and competitive fringe. For these two cases we find that the equilibrium allocation of sequestration aligns with a higher carbon price when the competitive fringe experiences an increase in its marginal cost parameter. Conversely, the carbon price falls when the dominant firm experiences a decrease in its marginal cost parameter. In a third case we evaluate the impact of stricter regulation on the abatement decisions of the polluting firm. Our results demonstrate the importance of incorporating into empirical supply-side models demand-side information that is reflective of an underlying market structure.

Keywords: carbon sequestration; competitive fringe; abatement credits (search for similar items in EconPapers)
JEL-codes: D43 L13 Q54 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-08-01
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-res
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https://repec.bus.usu.edu/RePEc/usu/pdf/eri2009-10.pdf (application/pdf)

Related works:
Journal Article: Carbon sequestration and permit trading on the competitive fringe (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:usu:wpaper:2009-10

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